Bad Press Aside, Target Has Upside Potential

NEW YORK (TheStreet) -- It's hard to think of a worse setback than the negative press Target (TGT) received when debit and credit card information was hacked from its database. But now, months later, some bright spots are helping the retailer's stock to rebound.

Shares, currently trading around $61, are down 11% for the year to date and down 3% for the past 52 weeks.

Popular stocks like TGT that yield nearly 3% or more I call "bond equivalent stocks," or BES. Lately, investors have been clamoring for BES companies with dividend yields higher the 10-year Treasury bond. This rotation has happened while speculative, high-price-to-earnings stocks have been correcting.

Other BES companies include Procter & Gamble (PG), Johnson & Johnson (JNJ) and technology dividend dominator Intel (INTC). As the following one-month chart of PG illustrates, the demand for BES equities has been ebullient.

PG Chart
PG
data by YCharts

Concerning Target, in spite of the negative press about the database breach, investors have been buying its shares as a BES, too, especially when the stock price drops low enough to lift the dividend yield closer to 3%. With an annual dividend of $1.72 per share, when Target's stock price drops below $60 it creates that desired yield. And there's more to Target than just an attractive dividend.

The nation's second-largest discount retailer is using innovations and customer awareness to keep traffic flowing to its stores. It's offering specialty products like organic and natural foods, and promotions like the chance to buy Samsung's (SSNLF) Galaxy 5 for only $100. This is a big discount on Samsung's star smartphone as a recent article in TheStreet pointed out.

After the initial announcement of the data breach in December, shares of Target continued to trade higher, reaching $64.17 on Jan. 2. After additional details were released and the possibility of a second breach, TGT shares sold off by nearly 14%. By Feb. 24 the stock cratered at $55.44.

Two days later, before the markets opened, the company released its fourth-quarter and full-year 2013 earnings report. Target's year-over-year quarterly EPS was $1.30, at the high end of the updated guidance the company provided in January. The company's full-year 2013 adjusted EPS of $4.38 was down 8% from $4.76 in 2012, but wasn't as bad as analysts had expected.

On the day of the earnings report volume nearly quadrupled to over 24 million shares and the stock closed up more than 7% from the closing price the day before. Since then shares have traded in a narrow range between $58.60 and $62.26. At the high end of that range the dividend yield is about 2.76%, still barely higher than the 10-year Treasury yield of 2.7% as of April 9.

A useful one-year chart shows both the annual price range for Target's stock and the quarterly revenue per share picture. If the share price follows the direction of revenue (orange line) I'm anticipating a realistic one-year price target of at least $65.

TGT Chart
TGT
data by YCharts

The company reports its first quarter 2014 financial results on May 21. If it raises the dividend or beats on EPS and sales growth, my one-year price target will rise as well.

Look for chances to buy shares when the fickle markets chase the growth stocks again and Target's share price falls below $60. I sense that will happen between now and this autumn. Then the BES crowd will start buying shares of Target again and history will repeat itself.

At the time of publication the author had positions in PG, JNJ and INTC

Follow @m8a2r1

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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Marc Courtenay is the founder and owner of Advanced Investor Technologies, LLC, as well as the publisher and editor of www.ChecktheMarkets.com.

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