Target Forming Constructive Cup-Shaped Base Ahead Of Q3 Earnings

Target NYSE: TGT has been forming a cup-shaped base since August 11, when it retreated from the a session high of $267.06. 

It’s been trading in a tight sideways pattern since October 25, and may possibly form a handle below resistance at $261.80. 

The current formation is a second-stage base. In March, the stock cleared a double-bottom pattern that re-set the base count, as the stock undercut it prior structure low. When that happens, it often sets the stage for new money to come into a stock at a lower price. 

With a large company like Target, whose market cap is $126.74 billion, institutions already hold huge positions, so in many cases, algorithms largely determine buy and sell points. That’s often why you see a fresh run-up after a new structure low.

After the double-bottom breakout, the stock rallied 36% in five-and-a-half months, before retreating into the current cup base. Target missed analysts’ revenue views in the most recent quarter, which explains at least some of the pullback. However, it had already declined beneath the August 11 high even before that report, an indication that institutions were ready to take some profits after a strong rally. 

Stock Gaining Ground Recently

Year-to-date, the stock is up 47.39%. It’s up 71.37% on a one-year basis.

In the past three months, as it corrected, the is down only 0.85%. That’s because it began carving the right side of its base, and now boasts a one-month gain of 12.91%. 

Target hasn’t announced the date for its third-quarter earnings report, but that should happen soon. A likely date would be around November 17 or 18, three months after the last report. 

At the time of its second-quarter report, the company said it expects high full-year single-digit growth in comparable sales, near the high end of the previous guidance range. 

The company now expects its full-year operating income margin rate will be 8% or higher.

Analysts see the company earning  $2.78 per share on revenue of $23.83 billion. 

That would be down a penny from the year-ago quarter on the bottom line, but an increase on the top line. 

As you might expect in an established large-cap, earnings growth rates are somewhat inconsistent, ranging from 8% to 525% in the past eight quarters. In the quarter ended April 2020, when pandemic restrictions first took hold, the company was profitable, but earnings declined 61% from the previous year. 

Strong Comps After Record Growth

Nonetheless, company executives expressed confidence in the current growth rates. 

“Typically, in retail, if you saw a large, mature company like ours growing at the rate we're seeing today, you'd assume we were comping over soft numbers from the prior year. Instead, we're comping over a year of record growth in 2020 on both the top and bottom lines,” Michael Fiddelke, Target’s CFO, said in the second-quarter earnings conference call.

MarketBeat data show that Target beat analysts’ estimates in each of the past 10 quarters. 

On September 23, the company declared a quarterly dividend of $0.90 per common share, payable December 10 to shareholders of record at the close of business on November 17. 

This fourth-quarter dividend will be the company's 217th consecutive dividend paid since October 1967 when Target went public.

The current trailing dividend yield is 1.14%.

I like how Target’s current base is taking shape in an orderly fashion, and believe it bodes well for future price appreciation. The base has corrected 17%, a healthy range amidst some profit-taking. 

The stock found support above its 200-day moving average, an indicator that institutional investors swooped in to pick up some more shares at a lower price. That’s another sign that the big money has confidence in the company’s prospects.