Motley Fool: On Target

Target (NYSE: TGT) turned in a solid earnings report last month, with third-quarter revenue popping 13.3% year over year to $25.7 billion, exceeding expectations. Digital sales were up 29% year over year, easily outpacing those of peers like Amazon and Walmart in e-commerce growth. The company also bought back more than $2 billion of its own stock, making existing shares more valuable.

Over the past few years, Target has proven itself a best-in-class retailer. The company has a unique approach to multicategory retail, a sector with only a handful of competitors such as Amazon, Walmart and Costco. Unlike its peers, Target has cultivated a “cheap chic” image, partnering with designers and developing 10 owned brands that each generate at least $1 billion in annual sales.

The company’s smaller stores (typically a third of the size of an average Target big-box location) are a key component of its growth strategy; they separate it from its closest peers, which only operate big-box stores or sell online. The small-format stores dovetail well with its store-based fulfillment, and should help Target increase its customer base in high-density areas like underserved urban neighborhoods and college towns.

Target’s aggressive share buybacks are a clear expression of management’s confidence in its growth strategy and long-term cash flow, as well as its belief that the stock is undervalued. At a recent price-to-earnings (P/E) ratio of 18, it’s easy to see why.

Ask the Fool

Q: I’m interested in investing in stocks that cost less than a dollar each. Do you recommend any? – H.C., Pueblo, Colorado

A: Nope. You’re referring to “penny stocks,” which trade for less than about $5 per share. If you have only, say, $500 with which to invest, it might seem smart to grab 2,500 shares of a stock trading for 20 cents per share, but it’s not. Penny stocks are notoriously volatile and are often tied to small and shaky companies without proven track records. They’re hyped online and are easily manipulated by shady characters.

Understand that with just $500, you might buy 10 shares of a $50 stock or one share of a $500 stock. Many brokerages let you buy fractional shares, so you might even buy half a share of a $1,000 stock.

Plenty of $500 stocks are on their way to $1,000 or more, while plenty of 20 cent stocks are on their way to 10 cents or less. Never focus solely on a stock’s price – focus on the business and its growth prospects.

Q: What are “required minimum distributions” (RMDs)? – G.I., Fayetteville, North Carolina

A: They’re withdrawals you must make annually from traditional IRAs, 401(k) plans and certain other retirement accounts once you turn a certain age. (They do not apply to Roth IRAs, though.)

RMDs were long triggered by you turning 70½, but the rules were recently changed. Now, if you turn(ed) 70 on July 1, 2019, or later, you can postpone taking RMDs until age 72. RMDs are generally taxable, and you may need to sell some stocks or other holdings in the IRA to generate the cash to withdraw. Learn much more about retirement topics at Fool.com/retirement.

My dumbest investment

My dumbest investment decision was just putting everything into mutual funds and index funds for the past 30 years, while staying away from individual stocks because I might lose money. I’m finally investing in individual stocks, and while I have a loser or two, my winners have more than made up for them. What makes me breathe easier is, when I’m up 150%, to sell enough to get my original investment back – and then never sell again. I then take that original investment and either put it in another stock or leave it in cash waiting for a great buying opportunity. After my first “secure your gains” sale, I’m committed to keeping everything I buy for years. – C.K., online

The Fool responds: There’s nothing wrong with sticking with good mutual funds. Better still are low-fee, broad-market index funds, such as those that track the S&P 500. Over the past 30 years, for example, the S&P 500 has averaged returns of 10% to 11% (not adjusted for inflation) annually. That’s enough to turn an annual investment of $10,000 into roughly $2 million during those 30 years.

For those with the interest, though, investing in individual stocks can be rewarding, and super-sized returns are possible – though far from guaranteed. Your approach of taking out your original investment leaves less money to grow in each stock, but it does mean you’re playing with house money after that.