I am offering Target (TGT) as this week’s MisterValuation Stock of the Week because I believe it offers an opportunity to provide important lessons about the significance of valuation. As I’ve written about many times in the past, I consider it an absolute fact that Mr. Market will often improperly price or value a stock. But more importantly, I believe a key to prudent and successful long-term investing is the ability to recognize inappropriate valuations when they appear. Moreover, it’s even more important to possess the foresight and courage that comes with it that allows you to act appropriately when aberrant valuations are identified. There are a couple of important realities that are implicit in what I have written above.
The first is to learn that fundamentals are more important than volatile short-term price actions. A good analogy is to think about a man riding an escalator while playing with a yo-yo. The escalator represents the fundamentals of the business, while they yo-yo represents stock prices bouncing up and down.
The second reality is to trust that stock prices will inevitably move back into alignment over the long run when they get temporarily disconnected. Although it is impossible to time these reversions to the mean with perfect precision, it’s enough to know that they are inevitable. Some reversions take longer than others, and some reversions happen very quickly. The key is to trust, believe and recognize that intrinsic value will be a long-term certainty.
The analyze-out-loud video associated with this article will present my reasons for offering Target this week and will highlight the important lessons about valuation described above.