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Got $10,000? Stock Up On Target Before 2021

By Adria Cimino - Dec 19, 2020 at 6:00AM

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Target's digital and delivery platforms will make the holiday season bright -- for the company and its shareholders.

Retailers have faced plenty of headwinds this year -- mainly due to the coronavirus pandemic. The spread of COVID-19 temporarily shut stores and pushed consumers to focus on buying essentials rather than discretionary items. Even though most stores have reopened, customers are still staying away from crowds as the health crisis continues.

Amid all this turmoil, Target ( TGT -2.13% ) emerged a winner this year. The grocery and general merchandise retailer has posted triple-digit gains in digital sales and even increases in store sales. Target also reported earnings per share that surpassed analysts' estimates in each of the past four quarters. Even though the stock has gained more than 30% this year, many clues indicate Target's performance is far from over. If you have a $10,000 stake available in a large, well-diversified portfolio, here's why you should consider investing it in Target.

Woman holding credit card and phone on desk decorated with oranges and cinnamon sticks

Image source: Getty Images.

An expert at the contactless experience

Target has become an expert at the contactless experience. The company offers order pickup, drive-up, and shipping options. In the third quarter, those services grew 217%. That's after 273% and 278% gains in the past two quarters. And Target stores fulfilled more than 95% of third-quarter sales. This use of stores for fulfillment is key because it helps Target save big. When a store prepares an order and a customer picks it up, the sale is 90% cheaper for Target than if the retailer had to rely on a warehouse. That's on a cost per unit basis.

Digital sales also have been booming. The company said online sales climbed 155% in the third quarter. Digital sales grew more than $2 billion year over year -- that's more than Target's digital sales in all of 2014, the company said in its earnings call.

In the coming months, Target will benefit from these strengths in digital and delivery. Coronavirus cases continue to climb in the U.S. And some states, such as California, have even issued stay-at-home orders for certain areas.

Long-term prospects

Now, some might say Target's delivery and digital advantages will wane as the coronavirus crisis eases, hurting the company's prospects. I don't agree. I remain positive about Target over the long term. The company's in-store business continues to grow, as I mentioned briefly above. In the third quarter, same-store sales climbed 9.9%. Traffic increased by more than 4%, and the average ticket rose more than 15%. As shoppers feel more comfortable about shopping in stores, store sales and traffic should rise further.

Market-share gains have given Target a boost this year -- and I don't expect that to evaporate. For instance, in just the first quarter, Target gained a year's worth of market share. In the third quarter, the company said it had gained, year-to-date, more than $6 billion in market share.

As for digital, growth may slow as the crisis eases. But don't expect a potential slowdown to be dramatic. Here's why: E-commerce was already growing -- both at Target and in general -- prior to the health crisis. Last year was the sixth straight that Target's digital sales rose more than 25%. U.S. e-commerce will rise 39% from last year to reach more than $476 billion in 2024, according to Statista.

And while Target has been serving up the social distancing consumers want right now, it also has been moving forward with other elements to drive future growth. It's increased offerings in grocery and now has fresh and frozen grocery drive-up and pick-up available at more than 1,500 stores, for example.

Target also has a positive annual profit and revenue track record. Both measures have been climbing since 2017.

TGT Net Income (Annual) Chart

TGT Net Income (Annual) data by YCharts

Why should you buy before 2021?

Target started the holiday season off right, reporting a record-breaking Cyber Monday. The retailer's digital strengths and contactless pick-up and delivery options should continue to attract holiday shoppers as they worry about the spread of coronavirus. I'm expecting Target will be a winner of the holiday shopping season and enter the new year in a strong position.

Holiday performance may drive Target shares higher in the near term. And that's why I would stock up on these shares before the new year. That said, you won't want to sell your shares after any early-year gains. Considering the strengths mentioned above, Target is a retail stock to buy and hold for the long term. It's likely to deliver gains well beyond 2021.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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