We recently compiled a list of 10 Best Quality Stocks to Buy According to Analysts. In this article, we will look at where Target Corp. (NYSE:TGT) ranks among the best-quality stocks to buy.
Income-Focused Investing
The stock market has seen a notable 20% increase year-to-date, but as it approaches the seasonally volatile months leading up to Election Day, potential volatility is expected. The S&P 500 has historically pulled back 5% to 10% around election time but tends to recover afterward.
Instead of cashing out, investors are encouraged to take advantage of any market pullbacks. Historically, when the Fed cuts rates without an impending recession, it creates a favorable environment for broader market performance. Mona Mahajan, Edward Jones senior investment strategist, recently appeared on CNBC to discuss her similar sentiment on these latest market trends, and where investors can find opportunities right now. We talked about this in our article about the 10 Best WallStreetBets Stocks To Buy Right Now, here’s an excerpt from it:
“When asked if investors should consider cashing out and taking a holiday for the remainder of the year, Mahajan advised against such a move. Instead, she suggested that if there are pullbacks or corrections in the market, it would be prudent to lean into those opportunities… Additionally, rate cuts typically lead to expanded valuations, particularly for sectors that have lagged behind in this regard. She emphasized that lower borrowing costs from Fed rate cuts would benefit both consumers and corporations.
In terms of investment strategies during potential downturns, she recommended focusing on cyclical sectors such as utilities and industrials while also maintaining exposure to technology and the artificial intelligence sectors. Mahajan underscored that diversification would be key over the next 12 to 18 months.”
Global Investment Strategist at ProShares Advisors, Simeon Hyman, appeared on CNBC on October 2 to emphasize ‘income’ as a key focus, highlighting the opportunity in fixed-income markets, which could provide 10-15% returns if geopolitical tensions worsen. He thinks that the US economy is stronger than the rest of the world despite tensions.
Simeon Hyman emphasized the importance of the term ‘income’ in the context of current market conditions, noting that the market was just 1% off its all-time highs. This situation presents a salary cut for income-oriented investors, highlighting the challenges they face. However, the fixed-income market offers a silver lining; it currently provides enough yield to cushion against worsening geopolitical tensions. For instance, the yield on the 10-year bond is nearly 4%, and there is potential for it to drop to 3% or lower if significant negative events occur. This scenario presents an opportunity for investors to realize gains of 10% or 15% on bonds in a tumultuous environment, a situation not seen in over a decade.
Despite the current market being down by 3.7%, which is slightly less than 4%, Hyman insisted that rounding was at play. He expressed surprise at this performance given ongoing geopolitical tensions but pointed out that positive economic news in the US persists. Specifically, there has been a 50-basis point cut and indications of a soft landing for the economy. A month-over-month increase of just 0.1% suggests that if one can overlook geopolitical issues, the US economy is faring better than many others globally and remains on solid economic footing.
Additionally, Hyman proposed a covered call strategy focused on the Russell 2000 index, which has been underperforming compared to the S&P 500. He described this strategy as beneficial because it allows investors to generate income that could offset recent losses while maintaining a bullish position in small caps. Historically, rate cuts have positively impacted small-cap stocks, and this strategy enables investors to capitalize on that trend while also generating income through covered calls.
For risk-averse investors, the current emphasis on fixed-income markets as a viable investment option aligns well with the insights shared by Simeon Hyman, who highlighted the potential for 10-15% returns in bonds amid geopolitical tensions. Additionally, they may also explore quality stocks with reliable growth histories, which can provide stability in uncertain market conditions, similar to the defensive strategies Hyman suggested.
Methodology
To compile our list, we first sifted through Vanguard U.S. Quality Factor ETF holdings to find the ones with an upside potential of over 15% as of October 4, 2024. We then selected the 10 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of their analysts’ upside potential.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Target Corp. (NYSE:TGT)
Average Upside Potential: 20.32%
Number of Hedge Fund Holders: 52
Target Corp. (NYSE:TGT) operates a chain of discount department stores and hypermarkets and is the seventh-largest retailer in the US. It’s known for its convenient locations, competitive prices, and a variety of exclusive brands. It also offers online shopping and in-store pickup options for added convenience.
Earlier this year, the company integrated GenAI into the handheld devices in its stores, providing its team with rapid access to best practice documentation and the ability to quickly receive straightforward responses to common customer questions. Team members have used the technology over 50,000 times since its full roll-out, giving answers in less than a minute.
Revenue amounted to $25.45 billion in the second quarter of fiscal 2025, up 2.75% from a year-ago period, driven entirely by traffic. Its digital sales grew, with same-day services like Target Circle 360 and Drive Up growing even faster. These services make up most of its digital sales and give it an advantage over competitors. Drive Up is especially successful, bringing in over $2 billion in FQ2 and over $4 billion so far this year. Overall, the stores and online sales are doing well, and more people are shopping at the company. Sales in clothing, one of its main categories, increased by 3%.
Target Corp.’s (NYSE:TGT) loyalty program, Target Circle, grew by 2 million new members in the quarter, reaching 100 million total members. During a promotion in July, it added hundreds of thousands of new cardholders and Target Circle 360 members.
The company donated $2.5 million this year to help communities affected by disasters. After Hurricane Beryl, Target Corp. (NYSE:TGT) supported the Red Cross, Team Rubicon, and other organizations to provide aid to people in Houston.
Diamond Hill Large Cap Strategy stated the following regarding Target Corporation (NYSE:TGT) in its Q2 2024 investor letter:
“Other bottom contributors in Q2 included CarMax, Target Corporation (NYSE:TGT) and ConocoPhillips. US-based mass retailer Target faces concerns about a slowing consumer discretionary spending environment, which weighed on shares in the quarter.”
Overall TGT ranks 8th on our list of the best-quality stocks. While we acknowledge the growth potential of TGT, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TGT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published on Insider Monkey.
