TGT is a Steal in this Market

As I said in my last post the market is venturing into bubble territory. When valuations get lofty it is difficult to find value in the stock market. In this type of environment you have to invest in established companies with solid balance sheets.

Target (TGT) is a company that is attractive in this market.

Mkt Cap: 38.21 Billion

P/E Ratio: 20.4

Dividend Yield: 3.45%

Target has a payout ratio of around 70% which is slightly high for a cyclical company but they have shown commitment to paying their dividend and the ability to generate enough cash to continue to increase it.

payout ratio: the percentage of a companies earnings it pays out in dividends.

I could delve further into their financial statements but there is a more important factor to consider: market sentiment. Target has had very public issues with privacy in the past year. The security breach was embarrassing for the company and the stock suffered.

While this fiasco did cost the company money it was no where near the 5 billion dollar decline in market cap that resulted from the sell off. This is far from an exact calculation but the bottom line is the market over reacted to this negative situation surrounding the company. When a negative story like the security breach comes out, investors sell just because they know others will. This mob mentality magnifies the fluctuations due to negative news.

While the stock is up around 10% from the low in February it is still off its 52 week high of $72.07. The market is still slightly afraid of Target and I see this as a buying opportunity.

The company still has its issues, mainly a botched expansion into Canada. Overall it is a healthy company whose stock has been battered by public opinion. With Target you are getting an established business that is poised to profit from economic recovery. The company also pays a healthy dividend that will reward investors while they wait for the market to realize that the stock is undervalued.

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”

― Warren Buffett

Is the Stock Market Over Valued?

Here is an interesting chart from JP Morgan that highlights the last 2 significant pullbacks in the market. Past performance is of course not a guarantee of future results but there are important aspects of this chart to keep in mind.

The market is trading around 16 times forward earnings. This number by itself does not signal a market due for a correction. In fact it is pretty much in line with historical P/E multiples. Increased earnings have pushed this market higher. An important thing to keep in mind is that companies can increase their earnings per share (the number used to come up with the P/E ratio) by repurchasing their own stock. If fewer shares exist on the market, then the earnings per share will be higher (Fractions!).

With interest rates at historic lows many companies have been financing share buybacks with debt. So does this mean that this P/E ratio is artificially low and there will be a correction? No one knows for sure!

Top analysts are split on wether this bull market has another few years in it or if a correction is looming within the next six months. Timing these dramatic swings is nearly impossible and can be very costly.

Having a diversified portfolio with strong companies can shield investors from major disruptions in the market. These inevitable sell offs are GREAT buying opportunities. The market as a whole was trading at 10 times earnings in 2009. If you had cash at any point in 09, 10 or 11 you did not have to look hard to find great deals on companies with solid fundamentals.

What should you do in this market? It is true that it is hard to find undervalued companies at the current levels. Nevertheless you can still find high quality companies. Investing in companies that pay a steady dividend is the best bet when the market is due for a corrections (wether it be months away or years away).

When a stock price goes down, the dividend yield goes up, assuming that a company continues to pay the same dividend (this is of the upmost importance when selecting dividend paying stocks).

I will discuss the benefits of dividend investing further in a later post. The point of this post is to establish that:

1. The market will always cycle through bear and bull markets
2. No one can predict when the market will fluctuate
3. Investing in strong companies that pay a dividend alleviate the pains of a crashing market
4. A long term investment stagey is the best way to ensure that wealth is created in the stock market

What this Blog is About

This blog will discuss the basics of investing in the stock market. The focus will be on investing in stocks with solid fundamentals with prospects of long term appreciation as well as stocks that pay a steady dividend.

It is possible to grow your wealth in the stock market by not getting caught up in short term fluctuations. This blog will cut through the noise and examine companies that will put your money to work efficiently.