Black Friday is here, and it’s coming at a good time. There have been quite a few markdowns on retail stocks lately.
Over the past two years, the SPDR S&P Retail ETF (NYSE: XRT) is down almost 40%…
So this is a good place to find some compelling bargains.
But instead of going dumpster diving and digging out the absolute cheapest retailers, I’m more interested in buying the really good companies that are going to be long-term winners.
Let’s Hit the Bull’s-Eye
Target (NYSE: TGT) released earnings on November 15, and the market loved what it saw!
The stock price surged by over 17% for the day.
Investors were excited about Target’s operating margin increasing from 3.9% to 5.2%.
The company is in the early stages of reducing costs, and clearly, the plan is working.
Despite the big surge on earnings, though, Target shares are still down 13% for the year and down almost 50% from where they traded two years ago.
I think the market is underestimating where Target is headed. I believe more margin expansion is coming thanks to additional cost-saving initiatives.
Target has also built a great real estate position. Almost every American lives within 10 miles of a Target location.
The company has transformed itself from a big-box store to a one-stop shop that offers everything from household goods to clothes to groceries.
And the stock is a true dividend champion.
It yields a juicy 3.39% as I write…
But much more importantly, the company has increased its dividend for 50 consecutive years!
The consensus analyst estimate is for Target to earn $8.34 per share in 2025.
That would mean the stock is currently trading at around 15 times its projected 2025 earnings.
That is a more than reasonable price to pay for this dividend grower…
But I expect Target’s earnings to beat expectations again as margins continue to improve.
If I’m right, then the stock is even cheaper than it currently appears. For that reason, The Value Meter rates Target as being “Slightly Undervalued.”
There’s No Place Like Home (Depot)
Home Depot (NYSE: HD) is a stock you can buy and hold for the long, long, long term!
The company has a dominant position in the North American home improvement market and a tremendous protective moat around its business.
That moat was created by Home Depot’s huge scale, which allows the business to have a powerful low-cost position, the widest product offerings and a strong loyalty program.
The company’s incredible long-term stock performance serves as proof of its brand strength.
This is one of the best-performing stocks of the past three decades.
But what I really love about Home Depot is its ability to return cash to shareholders.
Over the past five years, Home Depot has returned $70 billion to shareholders by way of dividends and share repurchases.
And I expect that number to be even larger over the next five years.
The dividend yield is around 2.72%, and like Target, Home Depot has a long track record of consistently increasing its dividend.
As of today, Home Depot trades at a price-to-earnings (P/E) ratio of just under 20.
That isn’t a table-pounding bargain, but it’s a fine valuation for a company that has compounded shareholder returns for decades.
And even though this juggernaut is a leader in the home improvement space, its market share is still just under 20%, so it has plenty of growth ahead of it.
The Value Meter rates Home Depot as being “Slightly Undervalued.”
Learn From My Mistakes
With a P/E ratio of 36, Costco (Nasdaq: COST) certainly doesn’t look cheap.
Sadly, my inability to recognize that Costco was still a bargain at high earnings multiples cost me terribly in the past.
Getting hung up on Costco’s P/E ratio has kept me out of this incredible stock on more than one occasion… and I won’t make that mistake again.
What I’ve finally realized about this great company is that it still has decades of growth in front of it.
And paying a higher price for long-term growth is worth it.
Despite the stock’s long-term performance, however, Costco’s management team has been extremely disciplined about its growth.
Costco has grown slowly and responsibly…
And it can keep growing slowly and responsibly.
While there are more than 4,600 Walmart stores in the United States, there are only 590 Costco locations.
I’m not saying that there will ever be 4,000-plus Costco locations in the U.S., but I certainly believe that the company could double or triple its store base.
Plus, with fewer than 300 international locations, Costco still has an entire world to expand into.
Location growth alone could drive Costco’s earnings higher for decades to come.
I also see huge leverage in Costco’s ability to increase net income with just minor increases to its annual membership fee.
In its last full fiscal year, the company posted net income of just under $6.3 billion, and a remarkable $4.6 billion of that came from membership fees.
Costco has not increased its annual membership fee for more than six years, and I believe it could see a significant jump in net income when it does finally raise the fee.
The great Warren Buffett is fond of saying that it is much better to buy a great company at a fair price than to buy a fair company at a great price.
And Costco is one of the greatest businesses in the world.
Even at Costco’s current valuation, I think it is a wonderful long-term bargain. The Value Meter rates Costco as being “Slightly Undervalued.”
If you have a stock that you’d like to have rated by The Value Meter, leave the ticker symbol in the comments section.