Target Corp is a Target for me No Longer + Extras

By: EBS Invests 

This is not to say that Target is not a great stock; their revenue and dividend growth are not something to pass by. However, as I looked to streamline my portfolio, it was evident to me that I should only own companies that foot the bill for excellence.

Last year, I read a book by Mary Buffett titled “Warren Buffett and the Interpretation of Financial Statements.” It was a great read, and the metrics that stuck with me are the following: gross profit margin of >40%, net profit margin >20%, research and development costs of <10%, 10-year consistent growth in EPS and revenue, and >5% free cash flow yield. Those are great metrics that we must keep in mind when looking at stocks. Sure, there are others we can include; however, to keep this consistent moving forward, those are the metrics I will mention for evaluating stocks.

Furthermore, there is a metric that one cannot measure with numbers; that metric is moat. I have included a picture below as a visual aid. However, a moat is how well this company sets itself apart from the competition. Companies like Apple (AAPL) have a very wide moat, as no one can replicate an iPhone. Or Microsoft (MSFT), it’s hard to compete with the size and offerings of their business.

In short, a moat refers to a competitive advantage that protects a company from rivals and sustains its profitability over the long term. It can be built on factors like brand strength, cost advantages, network effects, or regulatory barriers, creating a barrier that makes it difficult for competitors to erode the company's market position.

Now that we understand moats, let’s talk about all these metrics and what a medieval castle has to do with Target Corp.'s (TGT) stock. I started buying TGT last year with a cost-basis average of $142. I was still acquiring stocks for my portfolio, and TGT seemed to be at a discount. With an inflationary environment, shrinking, and recovering supply chains, TGT was struggling.

On the bullish side of this firm, it has a 5-year revenue CAGR of 7.76% and a 5-year dividend CAGR of 11.47%. From a dividend growth investor standpoint, it looks like a solid firm with growing revenue and dividends. Furthermore, TGT does have an FCF Y of 5.7% and is still recovering from previous highs of +7%.

From a bear perspective, applying the metrics I have listed above, its gross profit margin is 24.6%, much below the minimum of 40%. The net profit margin is 2.55%, below the 20% threshold. TGT has no R&D expenses, so that’s not listed. Furthermore, the firm has no moat from analyzing them versus their competition.

I have inserted a quote from Morningstar’s report on TGT by Noah Rohr that I think describes TGT well. “Target lacks the scale and differentiation to drive significant market share across its product categories since its product offerings lack a clear value proposition. Despite being the nation’s sixth-largest retailer, Target must constantly invest in cost-saving initiatives, product innovation, and store renovations just to keep up with behemoths Walmart and Amazon. [Further], Target's higher-margin discretionary product categories, such as apparel and home furnishings, are susceptible to losing market share via digital retail penetration, which could weaken the firm's margins. (A PDF of this report can be requested by emailing me; it is located at the end of the newsletter.)

It is evident that Target, despite growing revenue, earnings per share, and having an FCF Y of over 5%, is still not profitable enough. Circling back to the book, all I want is to own very wide-moat stocks that produce big profits. Companies like Microsoft are prime examples of this. That’s what Warren always said. That way, you need not be worried about how a stock will do or if it’s keeping up with its competition.

For those reasons, I sold TGT stock. I broke even on the position, and I redistributed the money into the portfolio. I’m sure TGT will go back up and hit an all-time high eventually. Or will it? However, I need not worry anymore about whether TGT is staying afloat, as it's no longer a target for my cash.

Johnson & Johnson (JNJ):

As detailed two newsletters ago, I mentioned that I was planning to sell JNJ. I executed a sale on JNJ for 1.9 shares, or ~$300, for a small gain. Similar to Target, although a little different, the reasoning for the sale is as follows: The loss of patents will lead to 2% growth in 2025–2030. Has not outperformed the SP historically for long durations. R&D cost to revenue is above 15%; I like it below 10%. Otherwise, this thing is a cash-flow producer and has a nice net margin.

Some bullish aspects are that KVUE will be gone; they can now just focus on pharma. They also have a wide moat, a nice gross profit margin, and a nice net margin.

I just personally don’t want to dabble with pharma stocks; it’s something I don’t understand. I don’t want to own businesses, which I don’t understand. I liked it when JNJ had access to KVUE; now that they split, it's just a drug maker. The past 20 years were great for JNJ; the next 20 may be a different story.

I took the money and bought two shares of XLV, which gave me great exposure to the healthcare industry. The ETF has also outperformed the S&P 500 historically. I will still own JNJ via this ETF, as 7.65% of the fund represents Johnson & Johnson. Some other great companies in the fund include UnitedHealth Group Inc. (UNH), Eli & Lily (LLY), Merck & Co. (MRK), AbbVie (ABBV), and much more!

I will add another share or two later this year. It is expected that with election cycles, healthcare will be a talking point, and generally, healthcare stocks react negatively to the sentiment. Potentially presenting an opportunity later this year. Needless to say, I think JNJ is a great stock; however, it does not fit my thesis. Why should I own a business I don’t understand?

I own a new ETF…

By: EBS Invests 

Before I start, I would like to say that I did not find this ETF. This was a recommendation from my friend Jared, so all credit goes to him.

I recently added a very strong ETF with a 5-year return of ~76% that has beaten the S&P 500 since its inception in September of 2019. This fund targets small-cap companies ($300 million to $2 billion in market capital) and has $8.91 billion in assets in the fund. The name of this ETF is $AVUV. It had never really crossed my mind to add small caps to my portfolio. I have always just bought the following three every two weeks since the summer of 2022: SCHX, SCHD, and SCHG. They’re great Schwab funds that target hundreds of companies; however, they typically only target large caps.

It was brought to my attention by my friend Jared that as the Fed cuts rates this year, it will make it easier and cheaper for businesses to take on debt to grow their firms. Making it easier for smaller companies, like small caps, to grow their businesses. Thus, if the business grows, so does its stock price.

After a few hours of research and checking other similar funds in the small and mid-cap space, I agreed with my buddy and decided that AVUV was the best ETF for small caps that money can buy. Although the expense ratio is higher at .25% and the dividend is less than others, I liked their holdings more, their past performance, and the dividend growth the fund offered was far better than other similar funds.

Thus, I acquired 6 shares for my Roth IRA at $85 a share. Roughly 11% of my portfolio. I plan on buying one more share and making it around 12% of my Roth IRA. A small but yet strong ETF to add to the Roth targets a future of growing small caps.

Re-investment of IBM Sale Money

By: EBS Invests 

After the sale of six IBM shares, detailed three posts ago (link to read old posts at the bottom of the newsletter), I had the intention of buying more SP 500-related funds. With the money, I purchased 5 SCHD and 5 SCHG. As stated in my Be a Winner…End of Year Review, I want to own more of the market. In my broker account, I had not purchased any SP 500-related ETFs in months. I try to keep the weighting of SP funds in the broker at 30%; however, it fell to 20%. With the re-investment, it’s back up to ~29%. I plan on making this 40% in 2024.

I will, however, be contributing more to my Roth IRA in 2024, as that’s a goal of mine, so brokerage account contributions will be less. Going forward, most sales of stocks will get redeployed into SP 500 funds unless an undervalued stock is deemed a better place to invest.

Stock purchases and dividends, Jan 15-Feb 24:

Purchases:

• AVUV - 3x

• SCHX - 4x

• AXP - 1x

• CP - 1x

• UNH - $64

• ALB - $49

• SBSW - 5x

• AAPL - $22

Dividends:

• SWVXX - $27.63

• SBUX - $1.65

• JPM - $1.51

• AXP - $1.18

• AAPL - $0.53

  Total in period (1/15-2/24): $32.78

  YTD Total: $40

  Life Total: $489.22

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//See you in the next edition

EBS Invests 2024//

est 2023

NOT A FINANCIAL ADVISOR.

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