Big-box retailer Target (TGT 1.04%) has been one of the S&P 500's worst-performing stocks this year. Poor growth numbers and concerns about the overall economy have been weighing on its valuation of late. The stock is trading at levels it hasn't been at in multiple years.
While Target's stock does look cheap, investors may be worried that it's not necessarily a bargain but instead a value trap and that the stock may be destined to fall even lower. Is that the case with Target, or could the market be overreacting to its recent struggles? Is it a stock worth adding to your portfolio today?
Image source: Getty Images.
Target has been struggling to grow
The big problem with Target is that its business has been sluggish, and that's been going on for a while. The company experienced a boom amid the pandemic, but it has been difficult for it to simply generate positive growth in recent quarters.
TGT Operating Revenue (Quarterly YoY Growth) data by YCharts
Target relies heavily on discretionary spending, which makes it vulnerable to slowing economic conditions. And what's most concerning is that the worst may still be to come -- a full-blown recession.
For now, the economy is still doing relatively well, but if there's more of a slowdown and consumers further tighten up spending, then Target's top line may go on a much deeper nosedive in future quarters. The company is looking at raising prices due to tariffs, which may only exacerbate its current situation.
Target is trading at a steep discount
This year, shares of Target have declined by around 30% (as of June 20). It's been a brutal start that has pulled the stock down to levels it hasn't been at since early 2020. And the decline is also evident through the stock's price-to-earnings (P/E) multiple, which is well below its five-year average.
TGT PE Ratio data by YCharts
This steep discount highlights just how worried investors appear to be about the business. If the P/E is very low, that signifies that investors aren't confident about its future growth and are likely pricing in more challenging times ahead.
On the flip side, however, such a low valuation gives investors a bit of a margin of safety and buffer. If the company doesn't perform well, by investing in it at a discount, you may not be all that vulnerable to a steep drop in price. In the best-case scenario, where the business performs better than expected, the stock could be in a prime position to take off.
Why I don't think Target is a value trap
Many retailers are struggling amid the current economic conditions and the threat that tariffs pose to their businesses, not only Target. The company isn't doing well right now, but I think it would be premature to say its business is broken and that the stock is a value trap. It wasn't all that long ago that it was growing at a fast pace and commanding a much higher valuation. Unfortunately, concerns about the economy are impacting the business, and that can't be ignored.
If the company were doing badly and the economy was in good shape, then I'd be inclined to say that is indeed a value trap. But Target isn't at that stage right now. It could still endure some tough quarters ahead, but if you're willing to hold onto the stock for multiple years and be patient with it, this is a stock that could prove to be a bargain buy in the long run.
