Life isn’t fair. I don’t mean that it is necessarily unfair, just that if we expect fairness all of the time we will frequently be disappointed. Most of us learn this simple fact early, and our subconscious understanding of it helps us get through the inevitable ups and downs that we face in day to day life. In trading and investing too, fairness and its close cousin rational reaction, don’t always dominate. Take Target (TGT), for example.
The retail giant (they are the second largest in the US, behind only Wal-Mart: WMT) has had a rough few months. Ever since the company revealed the extent of their now famous cyber security breach, the stock has been in a downward spiral. Last month, when they first predicted a significant impact on earnings the pace of the selling increased. At that time, I wrote a piece that suggested that the selling was overdone and TGT represented value at around $60. I will freely admit that I was wrong, at least in the timing of the call and temporarily.
In today’s “what have you done for me lately?” environment, admitting mistakes is distinctly out of vogue, but for traders that admission is never a question of fashion, it’s just a way of life. Nobody in the history of markets has ever got 100% of calls correct and those that don’t understand and embrace that simple truth are doomed to failure. What successful traders do is analyze wrong calls and losing trades to see where they went wrong. That is hard to do unless you own the mistake in the first place.
In the case of my January call on TGT it looks like I made a classic mistake; I assumed some degree of fairness. Those of us with children tell them all the time that admitting mistakes is a good idea, and, if they should do so, the consequences will be less severe. This doesn’t seem to apply to corporations. What Target did was to admit and make public a problem that is much more common than some people realize. Most people in the cyber security industry seem to believe that if a company’s cyber security has been breached is not the question; it’s when and how many times? Or as Cynthia James of Kaspersky Labs put it in this Providence Journal article“There are only two kinds of companies: those who have been breached and those who will be breached.” Obviously, I don’t mean to belittle the magnitude of the event; it was a serious problem for millions of people, but aren’t we to some extent shooting the messenger over and over again here?
I believe we are, but it’s not just the market that is punishing TGT. In fact, that punishment seems justified given that customers also seem to be making Target pay for their mistake. This too is unfair. If anything, one should logically be shopping at Target if cyber security bothers you; they have had their turn and will be prioritizing security for some time to come.
Even so, when the company reported Q4 earnings earlier this morning, they detailed a significant decline in sales, down 3.8% from the prior year. Neither this, nor EPS of $0.81 were as bad as the market expected, however, and the stock is rallying in the pre-market. These “could have been a lot worse” numbers encourage me to, once again, suggest that TGT represents value.
I know, I know, shouldn’t I be once bitten, twice shy, and don’t I always bang on about one of the most basic of trading rules; never average a loser? Yes and yes are the answers, but reason must take over at some point; why not now? And, while we’re breaking my rules, let’s break another one and give a highly technical, chart based reason that gives me even more encouragement.
The chart candle for 02/5/2014 in the above chart is a classic signal of a turnaround for chart readers, a doji. A doji is a candle on a chart that looks more like a cross than a candle. The solid body of each candle on a chart like this represents the difference between the stock’s opening and closing price, and the “tails” that stick out of that body represent highs and lows for the session. Each candle represents the battle between buyers and sellers on any given day. When the candle is red the stock closes lower and the sellers have won, when it is green the opposite is true. When a doji is formed, it has been a tie and, after a sustained period of selling such as TGT experienced in January, it usually means that momentum is shifting.
So, as long as I am prepared to break two of my most fundamental rules and double down on a wrong call due to a somewhat wonkish technical signal, TGT looks like a buy. I could, of course, be wrong, and this morning’s rally will just represent a brief respite before the selling begins again, but I will promise you one thing. If that is the case, you won’t hear me whining “It’s not fair!”