3 Reasons To Avoid Target
With new cases of the coronavirus spiking in the US and worldwide .
With the already historic unemployment levels and job losses in recent months .
And with many Blue Chip stocks looking vulnerable when they’re supposed to be among the best areas to invest your capital.
There are few safe places to invest your capital today. And this number is growing smaller every day this crisis lasts.
The key to continue compounding your investments and build wealth is to keep investing well over time.
Most people think the number one way to do that is to invest in assets that will grow your capital over time.
And this is huge part of things.
But another huge part of this is also losing as little capital as possible.
The fewer investment losses you have the more capital you keep. And the more capital you keep the faster you can invest well to grow your wealth.
Both things are necessary to build wealth. But most only think of investing well.
Today I want to talk about the second part of things that few consider… Staying away from investments where you’ve got a high probability of losing money in.
3 Reasons To Avoid Target Stock
- It’s Got A Lot Of Debt
As a percentage of its balance sheet, Target (TGT) has a lot of debt….
In most recent quarter its balance sheet is made up of 75.1% of total liabilities. And its debt to equity ratio is 1.46.
I want to invest in safe stocks that will be around for decades to come to help me build wealth over the long term. This helps insure I lose as little money as possible over time.
Typically, this means I invest in companies that have little to no debt compared to their cash and equity… And usually this means I want to invest in stocks that have a debt to equity ratio below 1.
If you’ve seen some of our previous articles, I’ve shown you stocks that have debt to equity ratios and liabilities as a percentage of their balance sheets that are far higher than Targets.
Here are a few recent examples of those…
- 2 Reasons To Avoid Lowes
- 1 More Reason To Avoid Cruise Ships
- 5 Reasons To Avoid Hilton
- 1 More Reason To Avoid Cheniere Energy
Yes, if you look at any of those articles the stocks all have much higher debt ratios than Target does… But a company doesn’t have to have horrific debt numbers to make me uncomfortable investing in something.
Target’s debt levels are too high for my liking… Even though they aren’t horrific.
Especially with the mass uncertainty we’re dealing with today… I want the investments I recommend to you to be as safe as possible. And this means being even more careful about debt levels and risk.
But there’s another reason to stay away from its stock.
- It’s Not Producing Enough Profits and Cash Flow
In the last 12 months Target produces subpar operating profits. Is unprofitable on a net income basis. And it produces just above average free cash flow.
These all due mainly to increased costs related to the coronavirus and increased competition from Walmart, Amazon, and others in recent months and years.
In the trailing twelve months (TTM) period its operating profit margin was 5%.
Its net income profitability margin in the period was negative 0.6%.
And its free cash flow to sales (FCF/Sales) margin in this same time was 6.2%.
EDITOR’s NOTE – Trailing twelve months just means the last 12 months consecutively.
Generally, you want these numbers to be as high as possible on the positive side because that means the company is generating profits and cash flow from its operations.
For example, I look for companies to have operating and net profit margins above 10% on a consistent basis.
And I look for stocks FCF/sales margins above 5% on a consistent basis.
Why these numbers?
Because after evaluating thousands of companies over the last 13+ years of my career I estimate fewer than 5% of all companies in the world produce consistent operating profit and net margins above 10% over long periods of time.
And far fewer than 5% of all companies consistently have higher FCF/sales margins than 5% on a consistent basis too.
When a company surpasses these thresholds, it means the company is a great operating business.
And these profits allow the company to continually reinvest in and grow its businesses in a healthy way.
Target is a good operating business but its seeing lower profits because of the coronavirus and increased competition.
In time, this leads the company to have less money to reinvest in the business to continue competing well.
And this could cause Target to lose its competitive advantages over time.
Again, is this a massive negative deal now? No, it isn’t.
But I want to only recommend the best of the best to you.
And there’s still one more reason to avoid Target’s stock in the coming months.
- Its Overvalued
As of this writing Target is overvalued…
Its P/E is 22.2.
Its P/CF is 8.3.
And its forward P/E is 29.9.
On all these metrics I look to buy investments below 20 to consider them for investment.
Target is above these numbers on 2 out of 3 metrics which means its overvalued.
And this means investing in its stock today gives you no margin of safety in investing terminology.
When you invest in stocks that have a margin of safety it makes the investment safer. And it also means you should expect to earn higher returns owning its stock in the coming years.
The inverse of this is also true…
When you invest in a stock without a margin of safety it makes the investment riskier. And it also means you should expect to earn less owning its stock going forward.
None of this means I think Target will crash and burn…
I think it will continue performing well and increasing its dividend payouts to remain a solid Dividend King.
But due to the reasons above there is little to no margin of safety right now investing in its stock… And this makes it riskier.
Because of this I recommend you stay away from Target stock… Even though I expect it to continue doing well during this Pandemic.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.