Thursday, June 13, 2024

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When looking at Target vs. Walmart stock, both are trading well below their all-time highs. And based on their valuations today, Target is the better buy. To see why this is the case, we’ll dig into a few key metrics for each of these stocks. That’ll give more insight into their valuations. Then from there, I’ll share an even better way to trade both these companies at the same time.

Target vs. Walmart Stock

Since both companies are in the same industry, comparing their valuation ratios can be more useful. For example, since they’re both retail and grocery store giants, they have lower operating and profit margins. They’re capital intensive and require higher leverage to operate efficiently. To contrast, comparing to a software company wouldn’t make as much sense.

So, when looking at Target vs. Walmart stock, here are some key metrics to consider…

Metric Walmart Target
P/S 0.61 0.67
P/E 26 17
Dividend Yield 1.7% 2.8%
Payout Ratio 44% 41%

 

Walmart looks slightly better with a lower price-to-sales (P/S) ratio. But the opposite is true when looking at price-to-earning (P/E) and the dividend yield, as well as the payout ratio.

Both companies have a long history of paying dividends. As a result, the dividend yield can be a great indicator of value. And in general, the higher the yield, the better the value. That’s assuming it’s a sustainable payout going forward…

With the payout ratios coming in below 50%, both Target and Walmart stock have safe dividends. They should easily be able to keep paying and raising their dividends for years to come. On top of that, both companies have been buying back shares. They have reliable cashflows that allow them to continue rewarding investors.

In the short-term, there’s plenty of downward pressure in the economy. The pandemic messed up supply chains and now there’s an inventory glut for many retailers. However, Walmart and Target can survive and thrive past these challenges.

Even with inflation picking up, Target and Walmart can pass along rising costs to customers. This will help prop up revenue and profit margins shouldn’t deviate too much.

Overall, there’s a lot to like about both companies. But based on historical trends and current valuation metrics, I’d be more willing to put my hard earned savings in Target instead of Walmart stock.

Short Walmart Stock and Buy Target

Walmart is a slow moving giant. I wouldn’t consider shorting Walmart stock on its own. But based on its price relative to shares of Target, a pairs trade might be a solid strategy.

A pairs trade is when you short shares of one company and buy the other. Put in this context, you could short Walmart stock and then with that extra cash on hand, buy shares of Target. It can be a way to leverage up while also keeping risk in check.

Since both companies are similar, their stocks tend to move in a similar direction. In other words, they have a positive correlation. But with this pairs trading strategy, you’d be betting on Target vs. Walmart stock. You’d make money when shares of Target outperform Walmart.

There’s a little more nuance to this style of trading but that’s the big idea behind it. You can learn more about pairs trading with that link. And this strategy can also be useful for an extended downturn.

If both Target and Walmart move lower with the broader market, the short position can help hedge the overall move. This strategy might be a good addition to your portfolio over the next few months.

Final Thoughts

When looking at Target vs. Walmart stock, both are backed by solid companies. And for long-term investors, they should do well. But Target is likely the better buy and also a better income opportunity.

There are many different investment trends and strategies to consider. And with the markets always moving, the best opportunities come and go. So, to stay up-to-date with the markets, here are some of the best investment newsletters.

You can sign up for free and you’ll receive investing tips and tricks straight to your inbox. They come from investing experts that have many decades of investing experience. Here at Investment U, we strive to deliver the best investment research and ideas…

Brian Kehm double majored in finance and accounting at Iowa State University. After graduating, he went to work for a cryptocurrency company in Beijing. Upon returning to the U.S., he started working with financial publishers and also passed the CFA exams. When Brian isn’t researching and sharing ideas online, you can usually find him rock climbing or exploring the great outdoors.

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