Since stock markets around the globe have climbed steeply in the past 12 months, it's getting trickier to find businesses that offer growth at a reasonable price. One stock that I especially like right now is a retail stock that is amazingly cheap and will still double your money over the next four or five years—and we're not talking about the mighty Wal-Mart! It's the second-largest U.S. discounter and one of the nation's savviest retailers, whose earnings multiplied nearly five times in the past decade!
Today's question – how do we gain growth at a reasonable price? We're in a more sober era now, but some investors still seem determined to overpay for stocks. Fortunately, you and I don't have to stretch our standards of value in order to enjoy the kind of growth we're looking for. While today's market isn't bursting with bargains, a few do stand out.
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We're paying attention to the undervalued stocks in the retail sector. One stock in particular is on my radar screen and is fast-growing. The tiger is the Target (NYSE: TGT) chain and they're showing outstanding growth at the tightwad prices we like to pay. And stocks like Target still fetch reasonable P/E multiples and haven't catapulted far above technical support at their 200-day moving averages.
TGT, which also owns Mervyn's and Marshall Field's, has done well in the past year, gaining 4% after backing its February growth targets. During the crucial months of December, Target stores that were opened for at least a year increased a robust 5.6% over 2002. Our friends at Wal-Mart (every mass retailer's greatest challenge) could hardly keep up (4.3%).
Given the company's long record of brisk earnings growth, you might expect the TGT shares to be doing much better. At last glance, the stock was quoted at just 17X this year's projected earnings. (Formerly known as Dayton Hudson, Target has compounded its profits at a 17% annual rate over the past decade).
That's a lower multiple than for the market as a whole, even though TGT boasts stronger growth prospects (and a healthier balance sheet) than the average S&P 500 stock.
What gives? When it comes to the retail sector, are Americans dropping rather than shopping? As quiet as it's kept, this is one of Wall Street's secret fears. While I agree with observers who warn of the perils of excessive consumer debt, I suspect that their Cassandra prophecies won't come to pass for several years at least—certainly not until the current economic expansion flames out. It's far too soon to fret about such things today.
My advice -- take advantage of these anxieties and pay attention to this stock. I'm projecting a share price of $45-$50 by year end, and $80 by 2008 or 2009. Buy TGT at $42 or less.
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