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Buy Walmart, Sell Target?

By Rick Munarriz – Oct 16, 2020 at 10:35AM

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The two leading mass-market retailers are rolling in 2020, but one Wall Street pro sees just one of the chains as a stock worth buying right now.

When it comes to retail stocks one would think that Walmart (WMT -0.36%) and Target (TGT 0.42%) are inseparable. The two mass-market chains have thrived through the pandemic as retail outlets that never had to shut down through the early stages of the COVID-19 crisis. 

Walmart and Target pride themselves on giving shoppers more bang for their bucks, and that's the kind of value proposition that's resonating with consumers these days. But sometimes you have to break up the band. Jefferies analyst Stephanie Wissink assumed coverage of both discount retailers on Thursday afternoon. She has a buy rating on Walmart, but she's going with a neutral call on Target. Is Walmart really the better buy of the two chains? 

An empty shopping cart strolling through an aisle of groceries.

Image source: Getty Images.

Checking out

Wissink is impressed by Walmart's expanding ecosystem. The country's largest retailer has always been smart with strategy and technology, but Wissink's claim that Walmart is "the mall of the future" seems a bit generous. She sees Walmart picking up the pace from its historical range, gaining market share in the process. Her price target of $165 implies 14% of upside from Thursday's close.

She's not exactly down on Target. Her $180 price target calls for 9% of upside from Thursday's close. She does see signs of favorable momentum starting to form at the the retailer. Target may not be the "mall of the future" but it's certainly behaving well enough to be the mall of the present. It claims to have gained $5 billion in retail market share through the first half of this fiscal year. 

At first glance, Target would seem to have an edge on Walmart as the better investment in terms of most of the popular measuring sticks. Target has a slight year-to-date trading edge on Walmart. The cheap-chic retailer's stock is up 31% in 2020, with Walmart shares rising just 24%.

In terms of earnings-based valuations Target is fetching 23 times this fiscal year's projected profit. Walmart's stock is trading at 27 times this year's earnings. Income investors would also be drawn to Target with its 1.7% yield. Walmart payouts translate to a yield of 1.5%. 

Growth investors would also have to give Target the nod here. Business is picking up at both chains, and Walmart had a strong report this summer. Target just had a much stronger quarter. Single-digit growth has been the historical norm at both chains, but revenue rose 25% -- with earnings per share soaring 85% -- in Target's latest quarter covering the three months ending in early August. Digital sales have nearly tripled in the new normal, but this also includes a spike in online orders for in-store or curbside pickup. Walmart's quarterly report with revenue climbing 6% and adjusted earnings per share rising 23% was a market-thumping report at the time, but Target upstaged retail's top dog with its own numbers a week later. 

Walmart certainly has more advantages than Target when it comes to scale. It's larger with a wider net of international expansion. Walmart is also a lot more than its namesake chain as the parent of Sam's Club, British supermarket operator Asda, and several e-commerce initiatives. There is no reason not to own Walmart, especially as it has proven to be an all-weather investment for these challenging times. However, the argument for buying Target is even stronger. Buy both. There's no point in breaking up the band.

Rick Munarriz owns shares of Target. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Walmart Stock Quote
$152.42 (-0.36%) $0.55
Target Stock Quote
$167.07 (0.42%) $0.70

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