U.S stocks are expensive. The Shiller P/E ratio of the S&P is in extremely high territory.
Many analysts are predicting the market is going to drop or crash this year, and it very well may happen.
The only thing that has kept me from believing of a imminent drop is that we have one the most ignored stock bull market in our history. I don’t have people giving me stock tips, the average retail investor has been largely out of this market (until this year that is).
If you notice in the above chart, the S&P volume has finally shot up at the start of 2017. Otherwise known as the Trump trade. I think there is a chance that we may be at the start of a mania phase for stocks. Stocks trade on expectations, and the current expectation is that we will see some massive tax cuts.
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If we are at the beginning of a mania phase, then yes we are going to likely see an ugly crash/correction at some point. Here is how to proceed in the market:
- Be aware. Make sure you are paying attention. Not just to lines on a chart, but to what with bills getting past, the EU elections, strangers giving “hot” stock tips, and so forth.
- Hold/Save more cash.
- Obey you stop losses. If you don’t have a sell/exit strategy then do not buy.
- Expect volatility.
So on to the stock pick. This pick will likely make people’s stomach turn. Retail in the U.S has been hit hard. I’m sure you have come across many articles regarding store closures and declining revenue.
Target’s ($TGT) stock is down a lot. The stock had a high of over $80 a share just last year and now trades for $55.75, a sell off of over 30%.
I’m going to tackle some of the risks I see first and get them out of the way.
- Revenues were down in the 4th quarter of last year, and they may continue to go down.
- If we see imports get taxed more heavily or a trade war breaks out, that could really effect Target and other retailers.
- I’m not a fan of the shopping online to pick up in a store model which they are continuing to pursue. Isn’t that just shopping twice?
- The company is putting back $7 billion into it’s stores over the next 3 years. I don’t view this as a bad thing, as it is likely necessary for future growth. But I figure I would note it hear is it will likely cause their margins to drop during this time.
Now for the positive:
- By most metrics the stock is cheap. Forward P/E, Current P/E, Price to Sales ratio is only .45. Price to free cashflow.
- The dividend payout ratio is at 48%. I believe the current dividend is safe at this level.
- Target is still a great store where people love to shop.
- Online segment is growing as well.
Action: Buy Target up to $59
Use a 18% trailing stop or if the stock closes below $52.
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