S&P 500   5,123.41
DOW   37,983.24
QQQ   438.27
Divisive? Not for moviegoers. ‘Civil War’ declares victory at box office.
Israel is quiet on next steps against Iran -- and on which partners helped shoot down missiles
Can homeless people be fined for sleeping outside? A rural Oregon city asks the US Supreme Court
Germany's Scholz arrives in China on a visit marked by trade tensions and Ukraine conflict
India's Modi vows to boost social spending, make country into a manufacturing hub ahead of election
Olympic track uniforms spark online debate about who designed them and why they're so skimpy
Olympic track uniforms spark online debate about who designed them and why they're so skimpy
S&P 500   5,123.41
DOW   37,983.24
QQQ   438.27
Divisive? Not for moviegoers. ‘Civil War’ declares victory at box office.
Israel is quiet on next steps against Iran -- and on which partners helped shoot down missiles
Can homeless people be fined for sleeping outside? A rural Oregon city asks the US Supreme Court
Germany's Scholz arrives in China on a visit marked by trade tensions and Ukraine conflict
India's Modi vows to boost social spending, make country into a manufacturing hub ahead of election
Olympic track uniforms spark online debate about who designed them and why they're so skimpy
Olympic track uniforms spark online debate about who designed them and why they're so skimpy
S&P 500   5,123.41
DOW   37,983.24
QQQ   438.27
Divisive? Not for moviegoers. ‘Civil War’ declares victory at box office.
Israel is quiet on next steps against Iran -- and on which partners helped shoot down missiles
Can homeless people be fined for sleeping outside? A rural Oregon city asks the US Supreme Court
Germany's Scholz arrives in China on a visit marked by trade tensions and Ukraine conflict
India's Modi vows to boost social spending, make country into a manufacturing hub ahead of election
Olympic track uniforms spark online debate about who designed them and why they're so skimpy
Olympic track uniforms spark online debate about who designed them and why they're so skimpy
S&P 500   5,123.41
DOW   37,983.24
QQQ   438.27
Divisive? Not for moviegoers. ‘Civil War’ declares victory at box office.
Israel is quiet on next steps against Iran -- and on which partners helped shoot down missiles
Can homeless people be fined for sleeping outside? A rural Oregon city asks the US Supreme Court
Germany's Scholz arrives in China on a visit marked by trade tensions and Ukraine conflict
India's Modi vows to boost social spending, make country into a manufacturing hub ahead of election
Olympic track uniforms spark online debate about who designed them and why they're so skimpy
Olympic track uniforms spark online debate about who designed them and why they're so skimpy

Target Stock Has a Plan to Compound Your Investment

Target store

Key Points

  • Target stock has been beaten down in the past couple of years after some big financial plans by management.
  • What seems to be a negative is an opportunity in disguise for those who know how to look. 
  • The new capital cycle for the stock is attracting analysts to boost their price targets.
  • 5 stocks we like better than Ulta Beauty

Investing in stocks differs from buying bonds and other vehicles like commodities because they are exposed to two different cycles. Bonds perform based on the credit cycle set by the Federal Reserve (the Fed), and commodities perform based on the demand and supply cycle they also encounter; stocks, well, a bit of both and then some.

Consumer stocks are exposed to both the credit and demand and supply cycles of their underlying products or services. Still, they depend on the capital cycle management takes on throughout the other two cycles. Some companies must invest a lot of capital during a particular cycle phase, only to see it generate returns on the other end of the spectrum, which can hurt or benefit stock prices.

This is why today, Target NYSE: TGT is the perfect stock to consider looking at for a cycle upswing, for reasons that management thoroughly prepared shareholders for. The returns on investment in this business are at cyclical lows, but that could soon turn into new highs for profitability. Analysts have taken notice of this upcoming trend, and price action favors the idea.

Target - Is Former Glory Still a Thing?

Target stock was a stellar performer in the 2019 to 2021 cycle, where it rose by as much as 267% despite the United States (the only place the company operates) being in the middle of the worst economic environment it has experienced since the financial crisis of 2008.

So, what did the company do during these bullish years? Seeing that their net income rose by as much as 48% during the time, with a massive 221% jump in free cash flow (operating cash flow minus capital expenditures), management decided to take a controversial route.

You can see how well Target’s financials did here. But apart from this analysis, you will notice how, from 2022 until today, the picture took a wild turn for the “worse.” The stock sold off from its previous high, down to a low of $103 a share; that’s a 62% decline, by the way!


The decline in the stock can be attributed to a similar 60% contraction in net income, accompanied by a more than 100% fall in free cash flow, which was a loss of $1.5 billion in 2023. Most investors will naturally shy away from a stock burning down profits and cash flow like that, but here’s a second thought.

Most companies would have just paid a dividend, bought back stock, and even paid themselves a big bonus for such an outstanding performance. Not Target, though; they wanted to lock in their newfound position in the market and ensure that shareholders keep seeing the compounding effects they are used to seeing in Warren Buffett stocks.

In its annual report, Target describes its plans to spend $5.2 billion 2023 out of its operating cash flows. A nationwide initiative to redesign and restructure its existing stores allows Target to handle its stratospheric growth in demand more efficiently and efficiently.

Target Looking Far Ahead

These new store designs will act as a hub for logistics, posing a margin expansion opportunity by reducing costs across many stores. They are also making space for a few tenants to move in and drive even more traffic to their locations.

Ulta Beauty NASDAQ: ULTA and Starbucks NASDAQ: SBUX will now be found in most Target stores upon these redesigns. Understanding the positive effects that these changes will likely have on the stock, analysts at Oppenheimer and Wells Fargo NYSE: WFC recently boosted their price targets.

At a respective recommendation for the $170 and $165 price target, these firms see an upside of 11% and 8% from where the stock trades today. This, of course, comes as an added bonus to the annual dividend yield of nearly 3%, which is an additional testament to how well-managed the business is.

Another stock that suffered a similar fate to Target is Walt Disney NYSE: DIS, which burned a lot of free cash flow into streaming initiatives that didn’t necessarily pay out how shareholders expected, but that stock is now well on its way back to generating the types of margins that drive value investors straight to buying.

On a free cash flow yield basis, calculated as free cash flow divided by total equity, Target used to generate up to 38% for an outstanding metric head and shoulders above the industry.

Today, this metric sits at a ten-year low due to these heavy investments. Still, while some see this as a negative, it's actually an opportunity in disguise.

Once these property redesigns are done, profits start being made from the investments, and free cash flow and capital return to those high historical figures; the stock carries a high probability of following suit to its previous highs.

Should you invest $1,000 in Ulta Beauty right now?

Before you consider Ulta Beauty, you'll want to hear this.

MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and Ulta Beauty wasn't on the list.

While Ulta Beauty currently has a "Moderate Buy" rating among analysts, top-rated analysts believe these five stocks are better buys.

View The Five Stocks Here

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Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
Target (TGT)
4.8188 of 5 stars
$166.12-3.0%2.65%18.60Moderate Buy$182.04
Starbucks (SBUX)
4.9872 of 5 stars
$84.92-1.1%2.68%22.71Hold$107.71
Wells Fargo & Company (WFC)
4.4957 of 5 stars
$56.47-0.4%2.48%11.79Hold$58.37
Walt Disney (DIS)
4.5067 of 5 stars
$114.01-2.7%0.26%70.38Moderate Buy$124.54
Ulta Beauty (ULTA)
4.8955 of 5 stars
$442.32-1.2%N/A16.98Moderate Buy$570.70
Compare These Stocks  Add These Stocks to My Watchlist 

Gabriel Osorio-Mazilli

About Gabriel Osorio-Mazilli

  • gosoriomazzilli@gmail.com

Contributing Author

Value Stocks, Asian Markets, Macro Economics

Experience

Gabriel Osorio-Mazilli has been a contributing writer for MarketBeat since 2023.

Areas of Expertise

Value investing, long/short trading, options, emerging markets

Education

CFA Level I candidate; Goldman Sachs corporate training; independent courses

Past Experience

Analyst at Goldman Sachs, associate at Citigroup, senior financial analyst in real estate


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