My Top Retail ‘Buy’ for December Could Stage a Double-Digit…
Retailers rallied Thursday on news that retail sales increased by the most in eight months, rising 0.7% in November. These gains were mainly attributed to lower fuel prices and rising employment encouraging consumers to go out and spend this holiday season.
In the past month, consumer discretionary has gone from one of the worst-performing sectors to one of the best, up 3.6% compared with a loss of 0.5% for the S&P 500.
For those last-minute shoppers, there’s still time to play the trend. In each of the past five years, the sector has shown gains in December. And this year could be even better than usual with falling oil prices equating to a tax cut for many families.
Within the sector, my top pick is North America’s second largest general merchandise retailer, Target (NYSE: TGT).
The stock boasts outstanding technicals and upbeat fourth-quarter earnings guidance, driven by holiday sales, which are expected to be strong.
On Wednesday, Nov. 26, Target offered a pre-sale on select Black Friday deals. By 9 a.m. that day, online sales topped total sales on the same day last year. The company also reported Thanksgiving Thursday was its best online sales day in its history, with sales and orders rising 40% from last year.
Tablets, cameras, headphones, vacuums and game consoles were top online sellers. In store, Target reported selling an average of 1,800 TVs and 2,000 video games per minute in the first hour of being open on Thanksgiving.
Overall, the company expects U.S. same-store sales will increase 2% in the fourth quarter. Management anticipates strong North American sales will push adjusted earnings to the range of $ 1.13 to $ 1.23 per share, from $ 0.90 per share in the comparable year-earlier period.
For the full year, Target expects earnings to be flat, falling in the range of $ 3.15 to $ 3.25 per share.
Turning to the charts, shares have been in an uptrend since late May, when they hit a low near $ 54.
For several months, TGT encountered resistance at the $ 61 level, but in September, it finally broke through and ran to a high above $ 64.
Shares then pulled back with the overall market, before surging off their mid-October lows to create a very steep accelerated uptrend line. In November, TGT broke through its previous all-time highs, made in June 2013, to a new all-time high of $ 74.76.
A tiny shelf of resistance now exists near this level, while historical support should be near $ 70. Shares are consolidating around the $ 73 level. If $ 75 resistance (in round numbers) can be broken, the stock should continue its advance since no historical resistance would be in sight.
The measuring principle can be used to estimate the target for the rounded base TGT formed between July 2013 and November 2014. By adding the height of the pattern to the breakout level, we get a minimum target of $ 87.66 ($ 70.31-$ 52.96 = $ 17.35; $ 70.31+$ 17.35 = $ 87.66)
To minimize risk, I suggest waiting to make a move until shares have broken $ 75 resistance, which will still allow traders to reap a 17% return if the target is hit.
Risks to consider: Although Thanksgiving weekend sales were positive, there’s no guarantee the vital holiday season as a whole will be as upbeat. However, favorable macroeconomic factors, like rising consumer confidence, higher employment and lower fuel costs, should lead retailers like Target to report strong results.
Recommended Trade Setup:
— Buy TGT at $ 75.10
— Set stop-loss at $ 69.89
— Set price target at $ 87.66 for a potential 17% gain by mid-2015
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