3 Reasons to Buy Target Stock Like There's No Tomorrow

Key Points

• Target's incoming CEO promises more differentiated offerings.

• Certain short-term factors hampering the retailer will pass.

• The stock trades at an attractive valuation and merits a closer look.

• 10 stocks we like better than Target ›

Target (NYSE: TGT) has been in a challenging stretch. This is reflected in its share price, which has dropped more than 31% since the start of the year through Sept. 5. That's a severe underperformance, compared to the S&P 500 index's 10.2% gain and the S&P 500 Retail Composite's 7.8% increase.

However, the market appears to be reacting to short-term issues that looks resolvable. This makes a buying opportunity for long-term investors.

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Those willing to bear some short-term volatility should seriously consider taking advantage of this opportunity and buying Target's shares based on these three reasons.

Image source: Getty Images.

1. Back to differentiated offerings

Target offers basic items, like groceries. However, consumers have become familiar with the retailer and made it a popular shopping destination, based on its exclusive and differentiated merchandise at reasonable prices. These include various categories like apparel, accessories, shoes, and beauty products. .

Still, these items like beauty and home furnishings cost more than the everyday merchandise like food and beverages . Consumers have been stretched by high prices, and that's partly to blame for hurting Target's sales.

Target's fiscal second-quarter same-store sales slumped 1.9%. Lower traffic accounted for 1.3 percentage points of the drop, with reduced spending responsible for the balance. The period ended on Aug. 2.

The company's total sales, which include other revenue, like credit card income, fell 0.9% in the quarter. Management doesn't expect that to improve this year, and its guidance is calling for a low-single-digit percentage decline for the year.

There's reason for optimism, however. Aside from broad economic issues, Target has also strayed a bit from its core strategy.

The company decided to elevate current COO Michael Fiddelke to CEO, starting next February . He has promised to lean heavier into exclusive merchandise offerings that's different from other retailers and away from commodity-type offerings, focus on improving the customer experience, and invest in technology. I expect his plan, particularly differentiating the Target experience, to have a positive impact on traffic and sales.

2. Temporary factors will pass

Consumers have been hit with high inflation, particularly for basic items like food and housing. Currently, a changing tariff policy has added to people's uncertainty about the future. This could hurt retailers like Target because it will raise the company's cost and potentially harm its customers' spending if Target tries to pass along some of the increase.

Still, economic policies change, and the cycle will turn at some point. I'm optimistic that consumers will return to Target stores and the website when economic conditions improve, due to its unique offerings.

Target's traffic has also been hurt this year by those boycotting the company's decision to cut back on diversity, equity, and inclusion initiatives. Management has had discussions with community leaders, and this seems like a positive step.

3. Attractive valuation

The company's weak sales and the subsequent underwhelming stock performance have created a value opportunity. The shares trade at a price-to-earnings ratio (P/E) of 11, which is much lower than the S&P 500's P/E of 30. Target's shares also look cheap, compared to its historical valuation, with a 10-year median P/E of 15.

The market has become concerned about Target's ability to grow sales. However, I expect this will prove temporary as economic and social issues pass. Incoming CEO Fiddelke plans to focus on what makes Target special -- namely, merchandise that people want and can't get anywhere else, should draw in customers.

Considering Target's cheap valuation, both historical and relative to the market, investors should view the company's share price as a compelling buying opportunity.

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Lawrence Rothman has positions in Target. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.