Why You Should Buy This Undervalued Growth Stock Now

The stock market has been on an upward trend for about a year and a half now, and whether this will continue is debatable. But what’s clear right now is that the market is somewhat overvalued, so investors should pay attention to stocks with unusually high valuations and various metrics that measure this, such as the price-to-earnings (P/E) ratio.

The Shiller P/E ratio, also known as the cyclically adjusted P/E (CAPE) ratio, is well above average, currently at 34, up from 28 in April a year ago. It’s not as high as it was in October 2021, when it hit 38 and the market crashed shortly thereafter. But it is moving higher.

So now may be a particularly good time to look for undervalued stocks with strong growth potential, and one good option to keep an eye on is: target (NYSE:TGT). Here’s why:

Soaring profits by reducing costs

The target stock price has risen 12% since the beginning of the year, and given the low valuation and solid profit potential, there is still room for further management.

The stock currently trades at 17 times earnings, down from about 26 times in April 2023. It also has a forward P/E of 17x, so it is expected to be a good value relative to expected future earnings.

Target had a successful last fiscal year, posting earnings of $2.76 per share for the quarter ended Feb. 3, up 57% from the previous year. For the full fiscal year that ended Feb. 3, Target reported earnings of $8.90 to $50 per share. % higher than 2022 — Savings of $500 million this year due to efficiency initiatives. The plan included reducing inventory levels by 12%, helping reduce freight, supply chain and operational costs.

Target isn’t scheduled to report first-quarter earnings until May 22, but the retailer expects it to be its worst quarter of the year, with comparable-store sales expected to decline 3% to 5% and earnings per share (EPS) expected to decline. there is. It ranges from $1.70 to $2.10. This will decrease by 10-20% compared to the previous quarter.

Target is still impacted by inflation, but it expects year-over-year sales growth in the remaining three quarters of the year as inflation is expected to decline while interest rates remain low. For the full year, the company expects revenue growth of 0% to 2% and EPS in the range of $8.60 to $9.60, with the midpoint coming in at about 2% year-over-year.

Well positioned for the long term

Target has had a difficult few years, with sales falling due to inflation. But even after two of the worst years in recent history, it’s still delivering an average annual return of about 11% as of May 6. Target has also increased its dividend for 53 consecutive years, making it a dividend king. .

But retailers have taken advantage of this lull to position themselves for long-term growth by cutting costs, managing inventory and rebuilding cash. In fact, Target doubled its operating cash to $8.6 billion in 2023.

This will allow the company to execute its long-term plan to remodel most of its 2,000 stores with the goal of growing comparable store sales in the low-to-mid single digit range annually over the next decade. It also plans to build 300 new stores, which it hopes will boost sales by about $15 billion annually.

This week, Citigroup upgraded Target to Buy with a target price of $180 per share, which would represent a 12.5% ​​upside from current prices. Citigroup analyst Paul Lejuez said Target has emerged as “one of the winners in the retail space” with opportunities to improve margins.

Overall, Target is a Buy consensus among analysts from the 36 firms that cover it, with a median price target of $190 per share, which would represent an 18% increase from the current $160 per share.

Given the expected difficulties this quarter, investors may want to keep an eye on Target’s stock as it could trend lower after its May 22 earnings release. But even at its current valuation, Target looks like a good buy right now.

disclaimer: All investments involve risk. Under no circumstances should this article be taken as investment advice or constitute liability for investment profits or losses. The information in this report should not be relied upon for investment decisions. All investors should conduct their own due diligence and consult their own investment advisors when making trading decisions.