Meet the Value Stock That's Crushing the S&P 500. Here's Why It's Still a Great Buy in September.
Key Points
After languishing, Target's shareholders have enjoyed this year's return.
The new CEO has implemented plans to boost sales.
Early results suggest the company has been executing well.
After a period of underperforming the market, Target (NYSE: TGT) shareholders have been pleased with this year's return. The stock has had a total return, including dividends, of 71% year to date through Sept. 8. That crushed the S&P 500 index's 13% return.
Nonetheless, the share price has a lot more upside potential, given Target's prospects and valuation.
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Target's sales were sluggish before this year. But Michael Fiddelke, promoted to CEO earlier this year, hit the ground running. He implemented plans that included going back to the trendier, differentiated merchandise that originally drew customers to Target. Fiddelke has also invested in store improvements and technology to improve the shopping experience.
Although it's early in the process, this year's results have shown improvement. Target's fiscal second-quarter same-store sales (comps) grew 3.8%. Notably, the increase was almost entirely driven by higher traffic, which accounted for 3.6 percentage points.
It's not discounting merchandise to boost sales, either. Excluding tariff refunds, Target's gross margin expanded about 1 percentage point to 30%. That's due to fewer markdowns and higher sales of advertising and other non-merchandise sales.
Meanwhile, despite the 66% share price gain this year, Target still has an attractive valuation. Target's price-to-earnings (P/E) ratio increased from 12 to 17 during this time. However, that's a much lower P/E multiple than the S&P 500's 26.
Additionally, shareholders can confidently collect dividends, given that Target has raised the payout for 55 straight years. That includes boosting this month's payment by 1.8% to $1.16 per share.
At the new quarterly rate, Target pays a $4.64 annualized dividend. That equates to a 2.9% dividend yield, nearly triple the S&P 500's 1.1% yield.
Lawrence Rothman, CFA has positions in Target. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.