The May 4, 2022 market rally may have been a dead cat bounce or a bear trap. Because, to put it lightly, we’re in the middle of the type of downturn we haven’t seen since the pandemic crash. The indices are amidst a 6-week losing streak, the Nasdaq is in a deeper bear market, and more than 36% of stocks on the index have declined at least 50% from 52-week highs. The Dow and S&P could soon follow.
Although there was some initial optimism after the Federal Reserve’s policy meeting six days ago, the S&P alone has also dropped 7.2% in the three trading sessions since then. It remains 17% below its early January high and at its lowest point since March of 2021.
In times like this, it’s easy to cut your losses and flee the market. It’s even easier to just sit out and not do anything. Yet, although more pain could be on the horizon, value stocks have held up considerably better than growth stocks. There are many opportunities to snatch high-quality companies with solid balance sheets and consistent dividend yields. Some undervalued companies are built to better withstand the economic carnage and monetary tightening.
Target Corporation (NYSE:TGT)
A retail giant with 25.67% of consensus upside – and 7.05% in a worst-case scenario.
Operating approximately 2,000 stores across the U.S., Target is the second-largest discount retailer in the entire country. Yet it is more than just a prominent player in the multiline retail industry.
It is a company with the ability to build on decades of consistent operations while evolving and innovating. Currently, it sits in the market as arguably its number 1 value play.
Target is currently trading at a significant discount relative to projected revenue, especially compared to overpriced competitors like Costco, Walmart, and the broader S&P 500. Currently, Target is trading at a 15.3x forward P/E ratio. In contrast, Costco trades at an astronomical 38.3x, Walmart trades at 22.2x, and the S&P at roughly 19.44x.
This is a mouth-watering value opportunity. When you consider how resilient Target was during the heat of COVID shutdowns and how firmly positioned Target appears to withstand inflation, supply chain issues, and recession whispers.
Management has been aggressively buying back shares. It has robust cash flows that can sufficiently cover interest payments. Total sales revenue is also up nearly $30 billion since 2019, reflecting more than $14 billion of additional store sales and digital sales growth of almost $13 billion.
Moreover, Target is considered a Dividend Aristocrat as its dividends have consistently grown over the last 50 years.
Despite recent market downturns, Target has also been a strong performer over the long term, dwarfing the returns of Costco, Walmart, the Dow, S&P, and Nasdaq over the past 5 years.
Furthermore, BarChart says Target is flashing some technical BUY signals based on its 20 – 50 Day MACD Oscillator, 20 – 100 Day MACD Oscillator, 20 – 200 Day MACD Oscillator, 50 – 100 Day MACD Oscillator, and 100 Day Moving Average.
Several analysts are immensely bullish on TGT’s stock’s potential. According to TipRanks, based on 18 total ratings from the past three months, the general consensus is that Target is a STRONG BUY. 14 rate it a buy, 4 a hold, and 0 a sell. Target has a low price target of $240.00, a high of $353.00, and an average of $281.76. The average price target represents 25.67% of upside potential from TGT’s May 9, 2022’s close of $224.20. But of course, if Target only approaches its low target in a worst-case scenario, it could still have 7.05% of room to run.
Although the overall market sentiment is sour, analysts have either maintained buy ratings or upgraded their coverage of Target since March. Gordon Haskett most recently upgraded TGT from a Hold to Buy and hiked its price target from $255 to $300. In a research note, Gordon Haskett analyst Chuck Grom noted “remarkably consistent” traffic trends in February and March that could continue climbing as the weather gets warmer.
Grom also stated that sentiment is too negative on the stock. In his opinion, the market will wake up and gain confidence in Target’s business model.
Beyond Gordon Haskett, Raymond James maintained Strong Buy, JP Morgan maintained Overweight, Deutsche Bank maintained Buy, and RBC Capital maintained Outperform ratings.
Target last reported earnings on March 1, 2022, in which it announced Fourth Quarter and Full-Year 2021 Earnings. Target reported record-high quarterly EPS with GAAP EPS of $3.21 and Adjusted EPS1 of $3.19, despite significant investments in team, price, and inventory availability.
Moreover, Target reported comparable quarterly sales that grew 8.9%, on top of 20.5% in Q4 2020, and comparable traffic that grew 8.1% on top of 6.5% in Q4 2020. More than 95% of Target’s fourth-quarter sales were also fulfilled by its stores.
Additionally, for the full year, Target reported:
- $106 billion in total revenue, an increase of $28 billion, or more than 35% over the past two years.
- Comparable sales grew 12.7% on top of 19.3% in 2020.
- Comparable traffic grew 12.3% on top of 3.7% in 2020.
- Double-digit comparable sales growth in 2021 for all five core merchandise categories, on top of unprecedented growth in 2020.
The Company’s year-to-date low and high are $184.00 and $254.87, respectively. With Target expected to report earnings on May 18, 2022, before the market opens for the fiscal Quarter ending April 2022, this is definitely a stock to monitor.
General Motors Company (NYSE:GM)
A severely undervalued automobile giant, trading at 52-week lows with almost 65% consensus upside.
For over a century, General Motors has been a blue-chip automaker and true American success story.
Today, it is best known for brands like Buick, Cadillac, Chevrolet, and GMC and its significant moves within the electric vehicle space. GM intends to go all-electric by 2035 and entirely phase out gas and diesel engines. It has also committed to spending $27 billion to introduce 30 electric vehicle models by 2025 while building an EV battery plant in Ohio.
Yet GM has been beaten down in 2022 and is currently trading around 52-week lows. It is striking considering all it has going for it, coupled with significant government support for EV initiatives.
The stock is currently trading with a 5.6x forward P/E ratio. It closed on May 9, 2022, at $38.26, nearly -43.07% below its record high of $67.21 on January 4, 2021, around a 52-week low, and its lowest close since November 2020.
This is a stunning and likely overblown decline, considering GM’s forward-thinking moves. Most recently, on May 10, 2022, GM announced a collaboration with Red Hat, Inc., the world’s leading provider of open source solutions, to help advance software-defined vehicles.
Many analysts and fund managers are diving into the stock and see a rock solid automaker aiming to spearhead the future of automobiles trading at a massive bargain. Cathie Wood, of all people, the well-known head of ARK Invest and huge Tesla bull, recently dumped shares of Tesla while adding GM shares for the first time ever. Wood’s firm bought 158,187 shares of General Motors in a transaction worth over $6 million.
This colossal purchase was also made nearly two weeks after GM posted quarterly earnings that beat estimates. On April 27, 2022, GM reported adjusted earnings of $2.09 per share, topping consensus estimates of $1.56 and continuing its long streak of beating earnings estimates.
According to TipRanks, based on 14 Wall Street analysts offering 12-month price targets for General Motors in the last 3 months, GM has a low price target of $44.00, a high of $98.00, and an average of $63.00. If the worst-case scenario happens and GM touches $44, that would give the stock a potential upside of 15% from its May 9, 2022, close of $38.23. Of course, 15% is nothing to scoff at, but the GM stock could have an astounding 64.66% upside based on its average price target.
Most recently, Berenberg Bank initiated BUY coverage for GM at a $55.00 price target, listing its transition to electric vehicles gaining steam as a reason why. Despite the stock’s decline, throughout April, many other analysts maintained or initiated strong ratings, including:
- Wedbush maintaining Outperform at a $50 price target
- Wells Fargo maintaining Overweight at a $72 price target
- RBC Capital maintaining Outperform at a $58 price target
- Deutsche Bank maintaining Buy at a $56 price target
- Exane BNP Paribas initiating Outperform
With the GM stock’s year-to-date low and high at $37.25 and $67.21, respectively, there is a real chance that GM could be at or around a bottom before the broader market touches one, and at a jaw-dropping entry point.
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