Target: Buy, Despite Security Breach

02/10/2014 7:00 am EST

Focus: STOCKS

A negative and unexpected event can have quite an impact on a stock; such has been the case with a database security breach at a leading retailer, explains Russ Kaplan, editor of Heartland Advisor.

Target (TGT), our latest buy recommendation, has seen its database's security compromised, causing great inconveniences to many customers. The price of the stock fell from a high of $73.5 in 2013, to its current price, which made them undervalued.

I believe this is a case where the investment community has acted more on emotions than on rational thought. Let's look at some of the reasons for my opinion.

A company in a weak financial position can be driven into bankruptcy by a negative turn of events, such as what happened with Target. Target, however, is not in a weak position, given its financial strength, which is rated by Value Line with an A.

Is this going to have a permanent effect on Target's business? I do not think so. Instead of stonewalling and making excuses to its customers, Gregg Steinhafel, the President of the company, admitted to the company making this mistake and promptly took steps to see that this type of thing never happens again.

When the problem hit, customers had easy access to getting help with their problems quickly and efficiently through their customer service. You could even get a person on the phone to help you. Target has also offered a year of credit monitoring to its Red Card customers.

In fact, this incident may actually help Target because it could act on the problem so quickly. Recent news indicates that this security breach was a much broader hacking job, using a new technique that is able to get around blocking devices that are currently used by Target and other retailers.

I doubt that many people are going to stop shopping at Target because of this one incident. Most everyone is aware that there are some risks to using a credit card. In addition, although some people were inconvenienced, not one person was impacted financially.

This reminds me of the tainted medicine scandal experienced by Johnson & Johnson several years ago. Like Target, they took immediate steps, the stock recovered, and today most people don't even remember this incident. The same will probably be the case with Target.

More important for the future, Target has taken some positive steps to keep up with current trends. It has started building stores in Canada, and currently has 124 stores.

Also important, Target, like WalMart, is penetrating the inner cities with a series of small stores better adapted to the needs of customers in those areas, and the results to date have been positive.

Target has a dividend of 2.7%, so it gives you a nice income while you wait for its recovery, which, I think, will probably happen sooner or later.

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