Target stock: great fundamentals but poor technicals (NYSE: TGT)

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Target is a discount retailer:

Target Corporation operates as a general merchandise retailer in the United States. The company offers food assortments, including perishables, dry groceries, dairy products and frozen products. clothing, accessories, home decor products, electronics, toys, seasonal offers, food and other merchandise; and beauty and household products. It also offers in-store amenities, such as Target Cafe, Target Optical, Starbucks, and other food service offerings. The company sells its products in its stores; and digital channels, including Target.com. As of January 30, 2021, the company operated approximately 1,897 stores.

It is the third largest member of this group by market capitalization:

Market capitalization of discount retailers

Market capitalization of discount retailers

Finviz.com

The macroeconomic context of this sector is positive:

Unemployment rate

Unemployment rate

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Unemployment rates for U-3s (in blue) and U-6s (in red) have fallen sharply since their peak at the end of the last recession.

As a result:

Two measures of income

Two measures of income

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Incomes increase. Personal income less transfer payments (left) is just off a 5-year high, while average employee hourly earnings (right) are up about 4.5% year-over-year.

Rising incomes support consumer spending

General Merchandise Retail Sales

General Merchandise Retail Sales

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Total purchases at general merchandise stores (like Target) are near 10-year highs.

And consumers are buying non-durable and durable goods at a steady pace:

Sustainable and unsustainable personal consumption expenditure

Sustainable and unsustainable personal consumption expenditure

Fred

Purchases of durable goods (in blue, left scale) and non-durable goods (in red, right scale) rose sharply during the last recovery.

All of this benefited Target (TGT):

Target gross income

Target gross income

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Total turnover started to grow again in 2018. But in the last recovery, it increased sharply.

Debt to asset ratio

Debt to asset ratio

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The company is well managed. Not only has the debt-to-asset ratio gone down over the past 10 years, but..

Income statement target percentages

Income statement target percentages

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… gross, operating and net income percentages were also incredibly consistent.

Finally, the company is cash-rich:

Target cash flow

Target cash flow

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The above is my standard cash flow statement. The third line subtracts investment from operating expenses to see if the company has cash after operating expenses. All years, the TGT was positive. I then add interest and dividend payments, which are then subtracted from the third row. The line labeled “cash after interest and dividends” shows that in all but one year (2012), Target has enough cash to pay bonds and shareholders. Finally, I subtract interest and dividend payments from EBIT, which is just another way to ensure that creditors and shareholders are covered, which they are.

Thus, the macroeconomic context is positive and the company’s fundamentals are solid.

What about the graph?

As they say in Texas, “Houston, we have a problem.”

Target weekly and daily chart

Target weekly and daily chart

Stock charts

On the left is a weekly chart, which shows a great example of a double top – a classic (and standard) topping formation. The daily chart (right) provides more detail. But ask any chart watcher and they’ll tell you it looks like a double top.

This is an excellent example of the fundamental principles that have been What invest while techniques tell us when. The first says that Target is a big company with a solid macroeconomic backdrop. But the chart definitely says no.

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