1 Growth Stock Down 49% to Buy Right Now

At first glance, Target (NYSE: TGT) does not appear to have much of a buy case. The retailer managed to increase foot traffic by 2% over the holidays. However, this translated into a modest 0.3% increase in comparable store sales.

With those numbers, it's not surprising that the stock has lost 49% of its value since 2021, a long-term downtrend that has probably discouraged Target bulls. Nonetheless, that sell-off may present an opportunity for investors despite the anemic growth, and here's why.

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The state of Target stock

Target is one of the largest retailers in the U.S. It operates nearly 2,000 stores, with locations in all 50 states. It stands out by taking what many analysts and customers might consider an "upscale discount" approach, emphasizing high-quality goods at a reasonable price.

It stands out above the competition with "stores in stores," with retailers such as Ulta Beauty having a designated area where only their products are sold. Additionally, it offers an omnichannel shopping experience, allowing customers to benefit from the best of both worlds in terms of online and in-store shopping options. In many cases, this includes same-day delivery, which is free for customers in the Target Circle 360 loyalty program.

So why has Target struggled? It is likely a victim of a sluggish economy in recent years as consumers struggled amid rising inflation. It also struggled to right-size inventory levels, a factor that keeps costs higher.

These challenges are concerning, since retailing is a dynamic industry. Investors should always remember that formerly successful retailers such as Sears and K-Mart once led this industry in the U.S. but barely exist today. That ongoing concern forces investors to ponder whether the struggles are likely temporary, or if Target is losing its edge.

Furthermore, Target's footprint leaves it with little room for further expansion domestically. Unlike peers like Walmart and Costco, it has no stores outside of the U.S., likely because of the failure of Target Canada in the previous decade.

So, what makes Target a buy?

Nonetheless, given the aforementioned stock pullback, the stock may present an opportunity for value and income investors.

First is its valuation. Target stock trades at a price-to-earnings (P/E) ratio of about 15. This is near multi-year lows for its earnings multiple, which has averaged 19 over the last five years. Retailers such as Costco and Amazon sell for 50 times earnings or above. Target's archrival Walmart's P/E ratio is 39, an indication that the pessimism around Target stock has become excessive.

Additionally, Target remains one of the best dividend stocks in the retail sector. Last year, it maintained its Dividend King status by approving its 53rd consecutive annual payout hike. That took its annual payout to $4.48 per share, a dividend yield of 3.3%. That is far above the S&P 500 average of 1.2% and its own five-year average of 2.3%.

Even better, investors should expect the payout hikes to continue. For one, abandoning a Dividend King status would undermine confidence in its stock, making a dividend cut unlikely.

Furthermore, it can likely afford to continue the dividend increases. Despite the recent struggles, its $2.1 billion in free cash flow for the first nine months of 2024 was well above the $1.5 billion it paid in dividends over the same period.

That left a significant amount of cash free for future payout hikes or other purposes. Investors should also note that free cash flows will likely improve if Target can reinvigorate sales. That factor alone could reduce investor concerns about the payout's future.

Consider Target stock

Ultimately, Target looks like a buy for value and dividend investors.

Admittedly, Target faces struggles with its sales growth. With comparable store sales barely positive and its lack of obvious expansion possibilities, it is unlikely to draw growth investors.

Nonetheless, the state of the economy and Target's inventory issues look more like temporary challenges than signs of long-term decline. The 15 P/E ratio indicates that the sell-off is overdone when considering Walmart's much higher earnings multiple. Hence, given this discounted stock price and high dividend yield, Target stock looks like an excellent choice for value and income investors.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Costco Wholesale, Target, Ulta Beauty, and Walmart. The Motley Fool has a disclosure policy.