The Motley Fool Take
Many investors are steering clear of brick-and-mortar retailers, worried about the rise of e-commerce. But while plenty of retailers are struggling, and big names such as Sears and Toys R Us have filed for bankruptcy, others are solidly profitable and even thriving.
Target (NYSE: TGT) is looking like one of the best of the bunch, featuring a price-to-earnings (P/E) ratio recently in the low teens and a solid dividend yield near 3.5 percent.
After making investments in e-commerce and its store base, Target is also putting up solid sales growth these days. In its third quarter, digital sales jumped 49 percent year over year, and adjusted earnings per share increased 20 percent. But the trade-off for increased e-commerce sales is lower profit margin, due to increased shipping costs and easier cost comparisons for consumers. That has led to a misguided sell-off of shares, setting up an opportunity for patient long-term investors.
With its “cheap chic” reputation and strength across categories like home goods, baby gear and apparel, as well as an improving grocery operation, Target has a unique profile in retail. Its strategy of expanding delivery and pickup capabilities, remodeling stores and opening new small-format locations in high-density areas (such as college towns and underserved urban neighborhoods) is paying off. Investors should see the company’s success for what it is: a growing opportunity in the e-commerce market.
Ask the Fool
Q: Can you explain what “vulture capitalism” is? - T.D., Saginaw, Michigan
A: Vulture capitalism is a kind of venture capitalism. Venture capitalism typically involves wealthy folks pooling their money and investing in small, fast-growing companies in their early stages, well before their initial public offerings (IPOs), when their stocks debut on the open market. Venture capitalists have provided early funding for companies such as Netflix, Facebook, Etsy, Dell, Skype, Ancestry.com and Twitter.
With vulture capitalism, investors provide funding to companies (and sometimes even governments) in crisis. That allows them to demand generous terms, usually at the expense of the companies’ founders and insiders. Vulture capitalists are often criticized for extracting profits from ailing entities without regard for their survival, as bankruptcy is a common conclusion.
Q: Why do bond prices fall when interest rates rise? - P.F., online
A: Think through an example: Imagine a $1,000, 30-year bond with a 3 percent interest rate. It will pay its owner $30 per year until maturity, when it repays the original $1,000. Remember, too, that while some people hold on to bonds through maturity, others buy and sell them in the markets.
Now imagine that interest rates rise, and new 30-year bonds are offering 3.5 percent. The old 3-percent bond won’t be able to compete with newer bonds’ higher rates, so its price on the market will have to drop to make it more attractive to buyers. Someone selling it, then, will have to accept less than its original $1,000. The buyer will receive the same $30 annual payments and will receive the same $1,000 at maturity.
When interest rates drop, bond prices rise, as people pay a premium for higher-yielding bonds. Learn more at InvestinginBonds.com and TreasuryDirect.gov.
My Dumbest Investment
Many years ago, I heard a radio talk-show host describe an impending financial disaster. He offered several plausible reasons why the stock market was going to take a precipitous dive, and I believed his warning. I had hundreds of shares of stock in companies such as McDonald’s, AT&T, Monsanto, Jiffy Lube, etc. I told my broker to sell all my stock, and he did. He didn’t try to reassure me or talk me out of it. Needless to say, I didn’t do too well. I ended up selling most of my shares at a loss. - S.R., Davenport, Iowa
The Fool responds: It can be hard to know what to do if you hear dire warnings and you aren’t well-versed in investing. Reading broadly and deeply about stocks and other investments can help you distinguish sensible commentary from nonsense.
That said, even the smartest investors will occasionally make bad calls. Ideally, you should know enough to be making your own decisions and not relying on others - unless you just plunk your long-term money in a low-fee, broad-market index fund and let it grow for many years.
Remember that the market will tank occasionally. But it has always recovered after drops, eventually rising to new highs. Buy aiming to hold for the long run, through ups and downs. Market drops can be great opportunities to buy more of great stocks. Keep emotions out of your investing.
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