Catch a US retail stock on the rebound

Having a strong macro climate does not guarantee things go well for a specific business or its investors. This week we look at two very different companies. One is a UK small cap that plays to a strong and regulation driven technology backdrop but has failed to convert that potential into larger returns. The other is a US retailing behemoth that misread an artificial demand surge but now presents a rebound opportunity and potentially pretty healthy returns.

Target (US:TGT) – Covid-19 and the aftermath was a good time for US retailers - over $800bn in stimulus payments drove a 15 per cent rise in retail sales in the 2021 calendar year. Target, a general merchandise ‘big box’ retailer, leaned too heavily into this temporary surge, over-expanding store count and inventory. This came back to haunt it as a huge drag on profits in 2022 and 2023. This, and a clutch of other strategic mis-steps, caused already low margins (typical for general retailers) to drop sharply leading to current forecasts being only half the levels of 18 months ago. This is all reflected in a 60 per cent peak-to-trough share price slump, but despite this fall the total shareholder return (TSR) has still averaged 17 per cent in the last five years - in the background this is still a good business. Management is righting the boat and numbers are on the up but the share price is still playing catch up with the rest of the sector. If the positive updates continue (which seems likely both from micro and macro drivers) the valuation gap should close further and investors can reasonably expect to see double-digit TSR over the next couple of years

Eckoh (ECK)  – this Aim-listed AI (artificial intelligence) and SaaS (software as a service) security company sits in a market with strong drivers but despite this and global leadership in some of its fields, has managed only to make an average two per cent TSR for investors over the last 10 years. There are a number of concerns that the UK arm is losing customers, the overall expansion of forward orders has potentially stalled despite the US arm powering ahead and a recent profit warning suggested that it has some cost issues. In addition, winning new work in the much larger but far more competitive US market is taking longer and proving more expensive.