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If I Could Buy Only 1 Stock, This Would Be It

The S&P 500 is hovering near all-time highs, but that doesn't mean there aren't plenty of stocks still worth buying today. Many promising tech stocks now look cheaper after rising bond yields sparked a rotation from growth to value stocks, while many businesses that struggled during the pandemic could recover as vaccination rates rise.

I recently highlighted several promising tech and retail stocks to buy in April. But if I could only add one of those stocks to my portfolio right now, it would be Target (NYSE: TGT), for five simple reasons.

1. A retail survivor

Back in 2014, Target seemed doomed to become another victim of the retail apocalypse. It struggled to compete against Amazon (NASDAQ: AMZN), its comparable-store sales were slipping, and it was racking up big losses from its ill-conceived expansion into Canada.

Image source: Getty Images.

But Brian Cornell, who took over as Target's CEO that year, and his management team pulled the retailer back from the brink. Target renovated its aging stores, launched smaller-format stores for urban areas, and turned its brick-and-mortar stores into a well-oiled fulfillment network for online orders, deliveries, and in-store pickups.

Target also launched new private-label brands to compete with fast-fashion retailers, expanded its loyalty program, matched Amazon's prices, and offered new same-day delivery options. Those efforts didn't bear fruit right away, but Target's comps growth eventually recovered and put it in a strong position to weather the unprecedented pandemic over the past year.

2. Strong comps growth and a rising store count

Weak retailers usually struggle with declining comps and shutter their stores to cut costs. Strong retailers, like Target, consistently generate rising comps, while opening new stores:

Fiscal Year

2016

2017

2018

2019

2020

Comps Growth

(0.5%)

1.3%

5%

3.4%

19.3%

Store Count

1,802

1,822

1,844

1,868

1,897

Data source: Target.

Target's rising store count strengthens its ability to fulfill online orders. Three-quarters of the U.S. population now lives within 10 miles of a Target store, which makes it easy to fulfill same-day deliveries or convince shoppers to pick up their own orders.

3. Robust e-commerce growth with stable margins

When brick-and-mortar retailers aggressively expand their e-commerce platforms, they often squeeze their own margins with online promotions and higher fulfillment costs. However, Target's gross margins have held steady, and its operating margins have gradually expanded, even as its digital comps have skyrocketed:

Fiscal Year

2016

2017

2018

2019

2020

Digital Comps Growth

27%

27%

36%

29%

145%

Gross Margin

29.2%

28.8%

28.4%

28.9%

28.4%

Operating Margin

6.9%

5.8%

5.5%

6%

7%

Data source: Target.

Target's gross margin dipped slightly last year due to rising supply chain and fulfillment expenses, as well as its higher sales of lower-margin products throughout the crisis. However, its operating margin still expanded as its network of stores withstood the massive spike in online orders.

4. Reasonable valuations

Analysts expect Target's revenue and earnings to dip 2% and 7%, respectively, this year as it faces tough post-pandemic comparisons. But next year they expect its revenue and earnings to rise 4% and 10%, respectively, as its growth rates normalize again.

Based on those estimates, Target's stock trades at 21 times forward earnings. Walmart (NYSE: WMT), which is expected to grow at a similar pace, trades at 24 times forward earnings.

5. A future Dividend King

Lastly, Target is a dependable dividend stock. It pays a forward dividend yield of 1.3%, and it spent just 17% of its free cash flow on those payouts over the past year.

It raised its dividend for the 49th straight year last June. If it raises that payout again this year, it will be crowned a Dividend King of the S&P 500 for maintaining that streak for at least half a century.

The bottom line

Target might not seem like an exciting investment, but it's one of the best-run retailers in the U.S. The seeds of growth it planted over the past seven years should continue to sprout, and its attractive balance of value and growth should make it an evergreen investment to buy and forget.

10 stocks we like better than Target
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Target wasn't one of them! That's right -- they think these 10 stocks are even better buys.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends the following options: long January 2022 $1920.0 calls on Amazon and short January 2022 $1940.0 calls on Amazon. The Motley Fool has a disclosure policy.


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