Penn Wealth Publishing

2019.01.13 Penn Wealth Report Vol 7 Issue 01

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12 penn wealth Report volume 7 issue 01 13 Jan 2019 Penn Wealth Report Copyright 2019. All Rights Reserved. investment intelligence Target Corp Multiline Retail e content of this report reflects the personal views, opinions, and research of Penn Wealth Publishing. While measures are taken to help assure the accuracy of data, no guarantees can be made and the firm is not liable for any losses incurred by subscribers. is is not a solicitation to buy. Always consult your investment profes- sional before investing any money. It wasn't long ago that we were urging investors to steer clear of multiline retailer Target (TGT $60-$63-$90) due to poor management and failure to execute on a questionable strategy. Former CEO Gregg Steinhafel simply didn't get it. Now, under the leadership of Brian Cornell, the "upscale discounter" appears back on track. All we were waiting for was an opportunity to jump back in at a reasonable price. at came with a vengeance, thanks to the night- mare that was Q4 of 2018. On 21 Dec 2018, within three days of Target hitting its low (on the Nightmare Before Christmas shortened trading session), we swooped in and purchased the com- pany for the Intrepid Trading Platform—at $62.39 per share. It is a company we know intimately, and we knew that investor emo- tions had just created a fantastic buying opportunity. Why the Intrepid and not the Global Leaders Club? Just because we see a company grossly undervalued does not mean it belongs in the Penn Global Leaders Club. While noth- ing should be set on "auto-pilot" (just ask Fed Chair Powell), this strategy holds forty companies an investor could realistically walk away from (i.e. not monitor on a reg- ular basis) and still sleep at night. While we do believe in Cornell and his strategy, we are looking for a potentially shorter-term gain rather than a long-term holding via our Target investment. Our first target price of $78 per share would equate to a 25% profit. Catalysts going forward. We recently found ourselves in down- town Denver, along a cool one-mile stretch known as the 16th Street Mall, and hap- pened across an eclectic Target store on the corner. It wasn't like any of the Target stores we had been in before. For some reason, it brought back memories of a famous invest- ment book from the '80s entitled "One Up on Wall Street, written by famed Fidelity fund manager Peter Lynch. I recall him beseeching would-be investors to "kick the tires" on potential investments. For example, he would ask his wife what it was about her favorite clothing stores that kept her coming back. After a little research, I found out that this particular Target store was part of a new urban strategy of opening smaller outlets in dense (think downtowns) areas and around college campuses to drive foot traffic and build on demo- graphic trends. Perhaps an Amazon might be able to pull off a store like the one on 16th Street, but (Penn Wealth stock) Walmart would not have been able to. Target serves a niche clientele; dare we say a market nestled between Walmart and Whole Foods. Or between (the soon to be liquidated) Sears and Macy's. Busy professionals who want a comfortable envi- ronment to pick up what they need on the way home. And that is a really large niche, armed with plenty of disposable income. at is part of what made the fourth-quarter downturn so bizarre. Here you had a company executing on the right fundamental moves, from omnichannel marketing to new store designs, yet the share price plummeted from $90 down to $62. Forget efficient market hypothesis, that was simply a mistake. And one we jumped on. Financials. As further evidence that Target was not over- valued, it has a tiny P/E ratio near single digits, a steadily-growing revenue stream, and a rock solid net income. Like clockwork, the company earns right around $3 billion every year, on sales of around $75 billion annually. Despite what the economy does over the next year or two, Target remains in an excel- lent position with respect to its product mix and its solid client base. So, we will collect our 4% dividend yield (the 10-year Treasury is at 2.7%) until we reach our price target. There was no logical reason for Target shares to plummet in the fourth-quarter, but it sure opened up a nice buying opportunity. ...This partic- ular Target store was part of a new urban strat- egy of opening smaller out- lets in dense areas and around college campuses.

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