Investors Observer Article Archives

The InvestorsObserver articles are provided by Fresh Brewed Media/VHS, LLC (“FBM Content”). The FBM Content, including any strategies discussed therein, is provided for general informational and educational purposes only and is not to be construed as investment advice or as an endorsement, recommendation or solicitation to buy or sell securities. In order to simplify the computations, commissions, fees and taxes have not been included in the strategy examples used in the FBM Content. These costs will impact the outcome of all stock and options transactions and must be considered prior to entering into any transactions. Investors should consult their tax advisor about any potential tax consequences.Use of the FBM Content is subject to the Terms and Conditions of the CBOE Website.

Back to Article Archives

Kevin Kersten's Analyst Insights

Options Analyst Writer
Kevin Kersten
Author Bio

August 13, 2012- Can you Target Profits from an Big-Box Store?

The retail atmosphere has been challenging over the last few years. Stores have to get everything just right. There is the product mix, promotions, price point, advertising, distribution, style and placement. There is training of associates, scheduling, cleanliness, presentation, lighting and merchandising.  From music playing in the background to having the right color of merchandise in stock, retailers play with a lot of variables.

Some retailers have been doing okay in the current market while others have cut deep and are just sort of holding on, hoping things improve. It has been a hard market and there are times that even if the retailer does everything perfect, they may not make the sale because the consumer does not have the money.

One retailer has been doing decent in the current market. S&P Analysts have given it a Five STARS buy rating as it appears to be slightly undervalued. Sales are improving with same store sales expected to increase 3.6% in FY 2013 as the company remodels stores into the latest formats. A rewards program has been set up, giving customers a 5% discount every day and the information generated has been vigorously data mined and is being used for more effective marketing. The store focuses on a slightly upscale market -- one section of the market that may be doing a little better as the economy improves. The company is also focused on international expansion that many people may have overlooked.

What company is this? Target. Target competes against Wal-mart (WMT), Sears (SHLD), Family Dollar (FDO), Macy's (M) and many other retailers. Target, though, is a little more expensive and more stylish than some of the deeper discount alternatives. There are over 1,500 Target Stores and 250 Super Target stores across the US and soon across Canada as well. The company employs 365,000 people and booked 69 billion in revenue last year.

Target has been doing a lot of focused advertising to its rewards cards members. It can reportedly tell when customers are pregnant just by their purchasing habits and has the ability to focus individual advertising to each customer without them even knowing it. Your preprinted advertisement might come with items you are likely to buy or need soon, disguised with other unrelated items so you don't realize it was custom printed.

The stock is trading at 62.36 with S&P analysts targeting $72 in about a year based on earnings, peer comparison and historical metrics. The company pays a dividend of $0.30 quarter which comes out to a 2.3% dividend yield. The stock reports earnings before the market opens on August 15 with analysts expecting 1.01 per share, near the 1.03 it reported last year.

The stock seems to be a decent buy and you may be wondering if you can take your Target rewards card with you and buy the stock at a discount. No, that is not available yet; but with a little work we may be able to get you a similar discount.

While the future seems to be optimistic for Target, there are reasons not to expect the stock to shoot to the moon. It is a big retail stock which moves slower and there are any number of variables such as product mix, overall economy, or changing consumer habits that could be just beyond the company's control. While being optimistic, also being realistic is good and so a covered call may not be a bad trade.

Take a look at the January 2013 62.50 TGT covered call at a 59.60 net debit. The covered call is just out of the money a few cents and has a 4.5% return over the next   five months. If you annualize that return (for comparison purposes only) it is an 11% return. The trade has 4.5% downside protection and a 2.3% dividend yield. If the stock stays flat or you are not assigned, you have effectively purchased the stock at a small discount and if you are assigned you lock in a 4.5% return.

Articles and other Content