Best Stocks of the Year: Target Is Number 5

Investors entered 2019 skeptical that Target could sustain its growth trajectory, but they've become believers.
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For 2019, TheStreet has compiled a list of the top 25 stocks of the year, looking at everything from stock performance and quarterly results versus expectations to execution against strategy and each stock’s overall story.

We polled a group of 18 writers and editors at both TheStreet and RealMoney and asked them to nominate candidates, and then winnowed that list down to the top 25 stocks. We then asked each of those writers and editors to rank the top 25 from top to bottom, and totaled up the points.

The result is a comprehensive list of the stocks that performed and executed the best this year, helping drive the S&P 500’s overall stellar year-to-date gains of 25% in 2019.

After publishing round-ups for the 25th-ranked through the 6th-ranked stocks, we're now running individual articles on our top five picks, with our top choice to be revealed on Friday. Please check TheStreet.com each day between now and then to read about our latest picks.

Picks 25-21 20-16 15-11 10-6

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Target shares have soared more than 90% in 2019 as the big box retailer has revived same-store-sales growth by leveraging its e-commerce operations and taking market share in higher margin product categories. Leading up to 2018, Target was losing out to rivals such as Amazon (AMZN) - Get Report and Walmart (WMT) - Get Report. Shares were pressured, and the stock entered 2019 at a steep discount to peers.

Here’s how Target turned things around:

Target’s Doldrums

Target's same-store-sales fell 0.5% year-over-year in 2016 and grew just 1.3% in 2017. Growth improved to 5% in 2018, but investors still took a long time to warm to Target’s new story, demanding to see evidence of sustained revenue growth. “There was so much dislike for the Target story -- it was just a perennial short,” Alliance Bernstein analyst Brandon Fletcher told TheStreet. "It started in 2017 and we had a very hard time convincing anybody to buy the stock.”

In 2017, Target announced a multi-year, $7 billion investment plan to revitalize sales, worrying investors who were concerned about the plan's impact on free cash flow. Under CEO Brian Cornell, Target set about revamping and “reimagining” roughly 2,000 stores to make them more conducive to the company’s e-commerce strategy. A major part of the plan called for adding fulfillment centers within stores.

The shorts and “disinterest” in the long only community, as Fletcher put it, had left Target trading at a one-year forward earnings multiple in the mid-teens. By comparison, Walmart was trading at around 23 times earnings and Costco was around 30 times, according to Joe Feldman, an analyst at Telsey Advisory Group. 

"There was a massive undervaluing of [Target's] earnings potential,” said Fletcher. 

E-Commerce

One area that's been a key part of Target's turnaround has been the transformation of its e-commerce operations.

Target’s store remodelings, added fulfillment centers and purchase of online delivery company Shipt allow it to use two new sales strategies: BOPIS, or buy-online-pick-up-in-store, and same-day delivery. The company said on its third quarter earnings call that 80% of revenue growth for the quarter came from same-day fulfillment options and in-store pickups.

“They’ve really revamped the digital side of their business,” said Feldman, who noted that Target’s mobile app is “best in class,” enabling Target to match the experience at Walmart.

Digital accounted for roughly 5% of revenue in 2017 but are expected to be 8.5% of in sales 2019 and over 10% of revenue by 2021.

Private Label Products

Another key to Target's rebound has been signing deals to sell coveted private label products in their stores. Target’s private label products have enabled the company to offer in-demand products, driving repeat customers, management said on its third quarter earnings call. 

Target has 40 home decor private label brands, and its Good & Gather program, a food and beverage private label offering launched in September, has 650 stock-keeping-units and could expand to 2,000 by the end of 2020.

“Private label can help you differentiate from online competition,” Michael Baker, analyst at Instinet told TheStreet.

Also, private label goods usually have higher gross margins. While Target management doesn’t disclose what portion of revenue private labels represent, analysts note the higher margins have contributed to a higher overall operating margin.

The company's operating margin is expected to expand to 5.9% for all of 2019, up from 2018’s 5.4%. Analysts polled by FactSet expect Target's operating margin to hit 6.1% in 2021, compared to expectations of just 4.2% for Walmart. 

In apparel, Target's private label clothes have enabled it to take market share away from classic discount retailers.

Apparel “saw the most dramatic share gains in the quarter,” management said on its Q3 call, with sales growing 10% in the quarter.

With such a dramatic turnaround and improvement in performance, it's not hard to see why Target is ranked No. 5 in our Best Stocks of 2019. 

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