Target (TGT 1.36%) gave investors a miserable update in its 2022 first-quarter earnings report, with a low sales increase, pressured margins, too much inventory, and not too much hope the rest of the year. As would be expected, its stock tanked, setting off investor fears and a wave of stock price declines.
But now is a great time to buy shares of the giant retailer, and it's not contrarian investing or a gamble. Let's dig into why it makes a lot of common sense to invest in Target today.
1. It's super cheap
Target stock typically trades at a fairly low valuation. Most mature companies do, since valuation is usually tied to a company's growth potential. That's why high-growth stocks often have astronomical valuations.
Target's stock shot up during the early stages of the pandemic when it was demonstrating high growth and resilience, and its valuation went up with it. Target stock is now down 33% in 2022, and its valuation has tumbled as well. With a price-to-earnings ratio of close to 13, it's at its cheapest since before the pandemic started, including the March 2020 crash.
Cheap doesn't always an attractive stock make. Low-priced stocks, or those with seemingly cheap valuations, could be a value trap, which means they look like values but don't present growth opportunities; they're cheap for a reason. But there are compelling reasons to believe that Target has many years of growth ahead, leading to the next reason to buy Target stock.
2. The long-term potential is huge
Target's growth throughout the earlier phases of the pandemic was much higher than that of similar companies. There are several reasons why it was well-positioned to make the most of that time, and those remain solid future growth catalysts.
Most importantly, it built up a robust and well-executed omnichannel network that fed strong demand for shifts in shopping trends. Its same-day services, in particular, saw spectacular triple-digit growth for several quarters. Target acquired same-day shipping company Shipt in 2017, giving it strong capabilities in this area.
The same-day services rely to a high degree on digital services, but Target also puts a lot of resources into its physical stores. Its exploration into a small-store format has been successful, and it's able to open more stores in denser areas with a curated product selection, allowing it to penetrate more regions cost-effectively.
Target has also had a lot of success with its owned brands, which have been an important revenue generator. It markets 45 private label product lines, and the low prices attract customers as well as add to improved margins.
Management has developed a strategy to deal with overstock and increased costs. Most of it is short term in nature, such as putting some items on sale and raising prices on others. But it's a well-thought-out plan that lays a foundation for future growth, such as having a holding facility near a port for more efficient inventory management and renegotiating supply chain processes for smoother operations.
As the company deals with current pain points and becomes more efficient, it will be poised to get back to higher growth when the pressure eases.
3. Its dividend is yielding 2.3%
Target recently became a Dividend King, which means it's raised its dividend for 50 consecutive years. That confers a certain status on a stock, since it implies that this is a reliable and growing dividend. The dividend yield soared as the stock price fell. It's now come down from hitting 2.9% just a few weeks ago, but 2.3% is still an excellent yield from a stock with growth prospects. It has a low payout ratio of only 28%, since the company is heavily reinvesting in growth ventures.
Target's price is already on the rise, up 12% over the past month. It's still quite a value, though, and now's the time to buy while it's still cheap.