When everyone is selling, insiders are quietly accumulating

As I have said several times, retailers relying on brick-and-mortar stores will continue to struggle at least if not totally dying in the future. In the past several quarters, virtually all such retail businesses have suffered, including the discount retailer giant, Target (TGT). Its shares have been knocked down over 30% since the beginning of the year. It is not exaggerated to say that no one is interested in TGT at the moment. But this is the exact time for value investors to step in if they still believe in the underlying business and consider the current troubles may not be permanent but temporary.  The best people knowing about it should be the insiders who are living with the business. You see, when insiders like CEO/CFO or board directors are selling their company’s stock, it does not necessarily they are bearish as there are tons of reasons why they want to sell that is nothing to with business performance or prospects. E.g. they may simply need some money for other family expenses or they may just want to diversify. If you don’t know, Bill Gates has consistently been selling Microsoft shares over years but he is still super bullish about the company. However, when insiders are putting serious money into their own stocks, there is only one reason: they see the value and believe it is oversold, period! In the past few weeks when TGT got decimated to below $60, a slew of executive insiders started to buy big time. I’m pretty sure they know the value of their stock better than you and me. But as an outsider and purely from the valuation perspective, I do think TGT is really very undervalued by all the metrics. This is still a cash generating business with EPS continuing to go in an uptrend in the past decade. At a price of low $50s, its PE is only 11, far below its average around 15. And it is a dividend aristocrat with a history of paying dividend for at least over 25 years. Even better, it is among a few that grow its annual dividend consistently over 10%. At the current price, its dividend yield is 4.5% at a payout ratio just around 50%. There is no reason to expect it will cut its dividend anytime soon with a very healthy cash flow, even if it may continue to struggle for a while before turning around its business.

 

With insiders sending a clear signal, I’m confident to believe that TGT will survive this challenging time period and will come back stronger by adjusting its business model. This reminds me what happened 2 years ago when Walmart (WMT) got similar slaughtering. As I said back then, I believed WMT would turn around. Yes, indeed WMT has certainly adjusted and come back again in a very strong uptrend. One biggest challenge for both WMT and TGT is how to compete with online sales with Amazon. WMT has already started to also introduce the 2 day free shipping services to boost its online business. TGT may likely also follow. Another bigger advantage both have over Amazon has not yet been widely recognized: the automated delivery by drones, the future delivering model. By design, drones have very short flying distance capacity. The widespread physical store locations throughout the country by WMT and TGT may allow them to be more easily using drones to deliver than Amazon. This may be one of the turning points for TGT if they can manage it properly and wisely to substantially boost its online sales.

 

But be cautious as always. We are still talking about a downward trend for physical retailing business. While I do believe the worst has probably been priced in for TGT, any sign of mismanagement about the turnaround plan may knock it down again. If you want to buy, buy it cautiously with a clear exit plan!