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Heading into the company’s first-quarter earnings report, Target Corp. (NYSE: TGT) was facing significant negative sentiment toward its stock. It turns out the skepticism was warranted.
The company announced first-quarter results Wednesday morning. Target actually beat the earnings per share estimate, with an adjusted EPS of $1.29, which compared favorably to the consensus estimate of $1.20. Despite the Target earnings beat, shares dropped sharply and were down as much as 11% in early trading.
Target Earnings Report Shows Sales Drop
The problem with the Target earnings report came from the sales numbers and the guidance. Target reported that sales dropped 5.4% compared to the same quarter a year earlier, at $16.2 billion down from $17.1 billion. The company stated that it expects second quarter sales to be flat to down 2%.
Looking at the daily chart we see the gap lower took the stock down to $65.50 and that coincides closely with the low the stock hit in January. The daily oscillators are both in oversold territory as the stock tries to stabilize today.
The good news is that Target is approaching potential support from the lower rail of a trend channel that has formed over the last seven years and there is a second layer of support from its 50-month moving average. The stock has used this moving average as support on a few occasions over the last six years.
Investors were pretty bearish toward Target heading in to the earnings report, as evidenced by its short interest ratio and the analyst ratings. The short interest ratio was last reported at 10.21 as of April 29. According to Marketbeat.com, 24 analysts follow the stock and of those 24, only eight rate the stock as a “buy” while 14 rate the stock as a “hold” and two rate it as a “sell.” That’s not exactly an optimistic view of the stock, especially when you compare it to the analyst ratings of online retailer Amazon.com (NASDAQ: AMZN) with 40 “buy” ratings and five “hold” ratings.
When you look at the whole picture for Target ̶ the fundamentals, the sentiment and the technical picture ̶ the recent pullback could be providing a buying opportunity. Target will need to improve the fundamentals going forward, but the pessimism toward the stock is running high. Any sort of bounce in the stock could cause the short sellers to cover their short positions and that would add buying pressure to the stock.
The chart shows two layers of support that could act as a springboard that could help the stock bounce back from the recent sell-off. Once the selling from Wednesday’s disappointing earnings report dies down, Target shares could bounce. I would look to buy the stock below $69 with a target back above $80. Should the stock close a week or a month below the 50-month moving average.
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