Friday, September 28, 2007

Target is on Target

We believe one of the best signals for investing in the retail sector is right after the retailers bemoan the fact that for whatever reason, "This year Christmas will not come." This week Target warned about potentially soft sales and earnings through year end. Since Target (TGT) is a leader in mass retailing, we would expect many more retailers to be making similar declarations in the weeks and months

Real estate news is gripping the headlines, but it is interesting to note that only 2.7% of "prime" mortgage loans are in default and that is where 90% of all mortgage loans are located. The subprime mess is a small part of the mortgage pie, and even though it is causing lots of pain, it does not drive the economy of the United States. Jobs drive the US economy and America is at work and that is the reason that delinquencies on prime mortgages are so low.

Indeed, as it relates to the retailers, we have also found that "he who hollers first" is often the ultimate winner. In this regard, Target is a company we like a lot. They have the right strategy, the right product mix, and we believe they will have a solid Holiday selling season and continue to gain on Walmart.

Our Dividend Valuation Model above shows that TGT is as good a value as it has been since 1996.

Target may not seem like an obvious pick for these times, but who doesn't know that? The "Christmas isn't coming" crowd got out of retail a long time ago. When they see that they are wrong, they will be back pushing Target and the other top flight retailers higher.