Trade Alert: Adding a retail short position to the Tematica Options+ List
Key Points from This Alert
- We are adding a Sell rating on Target (TGT) share and Shorting them on the Tematica Options+ Select List. Our price target is $60, and given the greater risk associated with shorting stocks, we will set a protective buy stop order at $80.
- We continue to rate the Cummins (CMI) March 2018 170 calls (CMI180316C00170000)that closed last night at 2.08 a Buy. Our protective stop loss remains at 1.25.
- We continue to rate MoneyOnMobile (MOMT) shares a Buy
- We continue to rate GSV Capital (GSVC) Jun 2018 10.000 calls (GSVC180615C00010000)at Buy at current levels. Based on when GSV reported its 4Q 2016 earnings, it’s likely we will be in a news vacuum for a few more weeks.
As we reminded investors on this week’s Cocktail Investing Podcast, volatility is bound to be with us over the upcoming weeks, much like we saw in yesterday’s market action following the minutes of the Fed’s January FOCM meeting. The key message in those meeting minutes was the Fed saw the economy heating up, and although it didn’t raise interest rates in January it’s vector for interest rates is higher over the coming year. Not exactly new news, but as we shared on this week’s podcast, the market will likely trade data point to data point until the Fed’s March FOMC meeting.
In all likelihood, this means we will be more or less trapped in a trading range, characterized by wide swings based on how good or bad the latest data is. In this case, good economic news likely means bad news for the market as the herd will probably take it to mean more rate hikes will be had. Of course, on the other hand, bad or weak economic data in the herd mentality would translate to the potential fewer rate hikes, and gains in the market.
If you’re thinking this sounds like a world that is upside down, you’re not alone. Much like with Tematica Investing, we’ll look to tread carefully and mindfully with shorter duration trading positions here at Tematica Options+ while we listen to the data along the way. With that, we have a new position to add this week . . .
Adding a short position in Target (TGT) shares
In early January, retailer Target (TGT) revealed that its comparable sales in the combined November/December period grew 3.4% compared with the expected range of 0%-2%. This led TGT shares to climb, as of last night’s market close, to just shy of a 12% gain thus far in 2018. That’s compared to 1.0% for the S&P 500 and 0.4% for the SPDR S&P Retail ETF (XRT).
Now for a sobering perspective. First, Target’s November/December sales results pale in comparison to the year over year increase of 5.8% for November/December Retail Sales reported by the Census Bureau. Second, based on its November/December sales, Target’s full-year 2017 sales growth clocked in at just 1% compared to the 4.5% for overall Retail Sales.
So, while Target may be doing a tad better than expected, it’s still losing market share.
If we drill down into the General Merchandise category that is Target’s bread and butter business, it’s performance still lagged behind compared the November/December year over year increase of 4.9% and the full year 2017 increase of 2.5%. Taking a cue from the Walmart (WMT) earnings call that I talked about in yesterday’s Tematica Investing, Walmart is being hit with rising investments and repositioning itself to ward off Amazon as well as rising freight costs. These factors contributed to Walmart guiding below expectations for the next several quarters.
On Target’s 3Q 2017 earnings call, it too talked about accelerating investments being a near-term headwind. Let’s remember too that Target will also be facing higher wage costs in 2018 compared to 2017. All of that should weigh on the company’s margin outlook for the coming quarters, much the way it did for Walmart.
At the same time, we at Tematica have been increasingly vocal about the state of the consumer given rising debt levels, low-to-no wage growth for the majority of workers and a dwindling savings rate. Of course, that’s on top of the fact that interest rates are set to rise in the coming quarters. As we have been pointing out, all of this likely means higher interest costs that will weigh on consumer spending. None of this is good for Target as it struggles to figure out how to compete against Amazon (AMZN), Walmart (WMT) and Costco Wholesale (COST).
Taking a Technical Look at TGT Shares
Looking back over the last seven years, Target shares have peaked at an average multiple of roughly 16x and bottomed out at 12.5x. Based on current 2018 EPS expectations of $4.71 per share for Target, this equates to upside to $76 and potential downside to $59 from last night’s close of just under $73. In my view, that’s not a lot of upside to be had vs. 20% potential downside. Factoring in Walmart’s comments and the impact we saw on WMT shares this week, my inclination is there is far more downside than upside to be had with Target on a fundamental basis.
Therefore, ahead of the company’s 4Q 2017 earnings results — scheduled for March 6th — we are issuing a Sell rating on the share and Shorting them on the Tematica Options+ Select List. Our price target is $60, and given the greater risk associated with shorting stocks, we will set a protective buy stop order at $80.
- We are issuing a Sell rating on Target (TGT) share and Shorting them on the Tematica Options+ Select List.
- Our price target is $60, and given the greater risk associated with shorting stocks, we will set a protective buy stop order at $80.
More confirming data points for our Cummins calls
Several paragraphs above, I mentioned that we’ll continue to listen to the data to direct our next move. In the case of our Cummins (CMI) March 2018 170 calls (CMI180316C00170000) that means competitors and suppliers to Cummins. Last week Rush Enterprises (RUSHA), one of the largest commercial vendors of heavy trucks that counts PACCAR (PCAR) as a meaningful customer, shared a favorable outlook for truck demand in 2018. Yesterday, Daimler AG updated its 2018 outlook for both truck unit sales and earnings saying both are expected to be “significantly higher than in the prior year.”
I see that as another confirming data point for our Cummins call options. As a reminder, my thesis on Cummins shares is rising freight costs reflect rising freight tonnage in a currently capacity constrained industry. As a quick reminder, when Walmart (WMT) reported its quarterly earnings yesterday it called out rising freight costs as one of the factors pressuring its margins and bottom line results. That pain point will drive demand for trucks, and trucks are powered by engines like the ones offered by Cummins.
- We continue to rate the Cummins (CMI) March 2018 170 calls (CMI180316C00170000)that closed last night at 2.08 a Buy.
- Our protective stop loss remains at 1.25.
Housekeeping items
Amid the earnings and Fed minutes this shortened trading week, there was no new information or data to be had for our some of our positions, which have come under pressure as volatility had jumped back into the market. In that information absence, we continue to have the following recommendations which have come under some pricing pressure.
- We continue to rate MoneyOnMobile (MOMT) shares a Buy
- We continue to rate GSV Capital (GSVC) Jun 2018 10.000 calls (GSVC180615C00010000)at Buy at current levels. Based on when GSV reported its 4Q 2016 earnings, it’s likely we will be in a news vacuum for a few more weeks.
