Closures and safety precautions over the past year definitely created winners and losers in the stock market, and much of that is reversing now that the U.S. is beginning to return to normal. That transition makes it hard for investors to know what to expect from many businesses this year…
With that caveat, it’s not difficult to find stocks that are priced for performance they are unlikely to deliver. For instance, it’s hard to imagine a scenario where Target (NYSE:TGT), Boston Beer (NYSE:SAM), and CoStar Group (NASDAQ:CSGP) are able to justify the lofty prices being paid for shares right now. They are all pushing the limits of what investors have ever been wiling to pay based on traditional metrics.
The pandemic may have changed how customers view retail big-box stores forever. As the virus spread last year, local governments’ forced closures of many small businesses funneled shoppers to destinations like Target, Walmart, and Home Depot. Remaining open helped those megastores capture market share and accelerate their online operations.
Target’s full-year results tell the story of a year like no other. The company delivered $92.3 billion in sales in 2020. That was $15.3 billion more than 2019. In fact, the $15 billion increase is more than the past 11 years of growth combined. Digital sales grew 145% year over year.
Those trends will have to persist if Target is going to justify the current price-to-sales (P/S) ratio of 1.14. The stock traded between 0.5 and 0.9 in the years before the pandemic. Even the forward price-to-earnings (P/E) ratio sits near 25. That’s a full third higher than its five-year average.
Just because a stock is overvalued doesn’t mean it will fall. Target is a great business, and it performed well over the past year. However, based on life returning to normal and how the company typically performs, shareholders might have to wait several years before the business performance catches up to the stock price.
2. Boston Beer
In addition to online shopping, something else people did a lot more of in 2020 was consume alcohol. Boredom, depression, and anxiety all contributed to the uptick. Historically, traumatic events such as Hurricane Katrina and 911 have induced more drinking. The pandemic joined that list in 2020.
The purveyor of Sam Adams, Angry Orchard, and Truly hard seltzer benefited from the increased demand. Depletions — end sales to retail customers — rose 37% year over year. Revenue came in at $1.7 billion, up 39%. Truly was a standout, delivering triple-digit volume growth for the year. The trends continued through the first quarter of 2021, with revenue up 65% and depletions rising 48%. That amazing performance probably needs to continue for shareholders to benefit.
Growth over the past decade has been a…
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