How does a bad call in professional sports relate to the selloff in Target (NYSE:TGT) stock? Allow me to explain. There are times when an official misses a call. Depending on the circumstances, a team has the opportunity to challenge the call. If the challenge is successful, the call gets reversed.
The selloff in Target stock won't be that easy to reverse. However, we believe that when analysts and investors take a closer look at the company's earnings report, they'll come to an agreement that the stock was punished based on what investors expect to happen and not on the overall strength of the report.
That's why we remain bullish on TGT stock and see it being part of any year-end rally in the market.
What Target Reported
Simply put, Target killed it. Revenue was 3% above forecast at $24.78 billion. And earnings were up over 7% above estimates at $3.03 per share. The company also guided higher with comp sales expected to grow in the high-single-digit to the low-double-digit range. Previously the company had said comp sales would be in the high-single-digit range, aligning with the 7.2% projected by FactSet.
Digital sales also saw a 29% growth which shouldn't be overlooked considering that many companies are seeing a more substantial drop-off since the economy is reopening. This is a testament to Target's investments to pivot to an omnichannel even before the pandemic.
Furthermore, the company outlined precisely how it manages supply chain challenges, including renting its container ships. The upshot is that Target is pledging to keep their shelves fully stocked this holiday season.
What Analysts Heard
Target has pledged to keep prices low during the holiday season. This means they're not (at least for now) going to pass along their increased costs to the consumer. In remarks following the earnings report release, Target CEO Brian Cornell explained the company's decision to protect prices.
“Prices are as important to our guests this year as safety has been throughout the pandemic.”
For obvious reasons, that statement has become the major takeaway of the company's earnings report. And for that reason, you can understand why investors may feel like Ebenezer Scrooge.
Analysts are paid to use reason, not emotion. So they will say dispassionately that the logical result of this decision will be lower earnings in the fourth quarter. For that reason, they can justify an opinion that the stock can't sustain its current price.
With TGT stock up 55% in the last 12 months, even after the selloff, it makes some sense. The stock has been flirting in overbought territory according to the relative strength indicator. In each case, the indicator has proved accurate. And this time appears to be no different.
Verdict
Self-fulfilling prophecies are tough to overcome. And that seems to be what's going on with Target stock. Target doesn't present a great trading opportunity at the moment. And the stock may have further to fall (although the after-hour trading activity shows the stock stabilizing).
However, in what appears to be shaping up to be a holiday season like few others, consumers have long memories. They will remember the companies that made it easy for them. The halo effect those companies receive can last a whole lot longer than a single quarter.
And even if the stock doesn't bounce back right away, investors can take advantage of the company's status as a Dividend King and a tasty $3.60 annual dividend for the "trouble" of owning the stock.
You may accuse us of nothing more than generous sentiment. But the world could use a little altruism, and investors could use a little holiday cheer. We believe they'll get both by ignoring the noise and buying TGT stock.