This Previously Down-on-Its-Luck Stock Has Been Quietly Outperforming the Market. Time to Buy?

The S&P 500 has been on rocky ground over the past several weeks, upset by a variety of concerns -- from worries about the war in Iran to concerns about the U.S. economy and questions about the massive levels of corporate spending on artificial intelligence (AI). All of these elements have weighed on the benchmark and on many stocks.

But some stocks have stood out as winners during this time of uncertainty. One in particular may surprise you as it's struggled in recent years. Revenue growth stalled, the company's sense of direction seemed unclear, and the stock performance reflected this -- it sank 38% over five years.

Today, though, this consumer goods player is not only delivering gains but may also be on the path to recovery and growth. Let's take a close look at this previously down-on-its-luck stock that's been quietly outperforming the market and consider whether it's a buy.

Image source: Getty Images.

From soaring revenue to a slowdown

The company that I'm referring to is Target (NYSE: TGT), a retailer that during early pandemic days saw revenue soar -- but in recent years has experienced a slowdown. Why the shift? During times of lockdowns and social distancing, Target's digital platform and variety of pickup and delivery options pleased consumers, helping the company grow revenue by $30 billion over a couple of years.

TGT Revenue (Annual) data by YCharts

Target has kept those gains, as the chart above shows, but it's struggled to grow in recent years for a variety of reasons. Customers have complained about the service in stores or the lack of products on shelves. Target angered certain customers when it launched diversity, equity, and inclusion initiatives, then upset others when it rolled them back. These problems resulted in some customers boycotting the retailer. And Target also faced the challenge of theft in its stores in recent years.

Meanwhile, the company has taken steps to turn things around, for example, cutting 1,800 corporate jobs last fall -- and now it may have reached a key turning point. Michael Fiddelke, previously Target's chief operating officer, took on the role of chief executive officer and recently laid out a plan to reignite growth.

A billion-dollar investment

The new initiatives include revamping floor plans and displays in Target stores, investing in payroll and training to improve the shopper's experience, improving the assortment of items on shelves, and using AI to deliver a better and personalized shopping experience. To set this plan in motion, Target aims to invest $2 billion this year, with half going toward capital expenditures and the other half allocated to operating investments.

And Target's earlier turnaround efforts have started to tip the balance, as we can see in the latest earnings report. For example, fourth-quarter net sales of about $30 billion met the company's guidance, and sales and traffic trends gained momentum in the last two months of the period.

So now let's return to our question: Is it time to buy this stock on the rise? Even after its 18% gain so far this year, a look at valuation shows us that it's still very reasonably priced at 14x forward earnings estimates.

The turnaround plan looks promising as it includes many elements, so it could truly transform Target in many ways. On top of this, details show the company will lean into its strengths, such as its owned brands -- which are higher-margin for Target than national brands and have proven their popularity with customers over time, with many reaching billion-dollar sales levels. Target aims to relaunch owned brand Threshold, a line of home goods, and expand the assortment of Cloud Island, a baby brand.

Of course, this transformation won't happen overnight. Target itself even calls the plan a "multi-year strategy," so investors may have to be patient to see clear results in top- and bottom-line figures. But now, as Target stock gathers momentum but is still inexpensive, it may be a great moment to get in on this stock and hold on as the recovery story unfolds.

Adria Cimino has positions in Target. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.