Retail stocks were punished on January 27, 2016 as fear levels increased over the potential for a border tax.The newly positioned Trump administration is seemingly favoring some form of an import tax and retailers are in the cross hairs if implemented.Bloomberg Intelligence analyst Caitlin Webber is quoted as saying Wal-Mart (WMT), Target (TGT), Best Buy (BBY) and Costco (COST) would face billions of dollars in extra import costs under a border adjustment tax as proposed by the GOP. The reality of such a tax is that the retailers would be forced to pass along this added cost to the consumer and naturally this may serve to curtail consumption, which could be demonstrative to the economy.While the news surrounding a border adjustment tax is still suspect and circumstantial, it remains to be seen whether or not such a tax comes to be. 

Fear, however, is a powerful entity and investors have taken action ahead of any realized border tax implementation by selling down retail stocks.Friday witnessed the major retail stocks and the retail sector ETF (XRT) fall by greater than 1% in most cases. Shares of Macy’s (M) held a 52-week closing low and Bed Bath & Beyond (BBBY) shares closed below $40 and at a 52-week closing low as well. I have long since been analyzing the struggles from these two retailers, over the last year in the case of Macy’s and three years in the case of Bed Bath & Beyond.

• Bed Bath & Beyond: Stay Away 
• Macy's Situation Is Getting Worse, As Previously Forecast: No Solution In Sight 

With the retail landscape and consumption habits changing, big-box, department store retailers continue to face pressures from the increasing shift amongst consumers toward digital shopping. Moreover, while these retailers continue to develop and fine-tune their digital offering, it is recognizably less incremental to their total sales than hoped upon by the retailers and their shareholders.Simply put, big-box retailers can’t scale their digital business quickly enough to offset the declines in their traditional brick and mortar business. Some are faring better than others in this “new normal” retail environment, but faring better is generally still producing negative same-store-sales results.

Most of your big retail brands like Kohl’s (KSS), Macy’s, J.C. Penney (JCP), Sears Holdings (SHLD) and Target have already reported negative 2016 holiday period sales.Alongside these negative reported results, the share price depreciation of the named retailers fell precipitously. What is also critical to understand from an investor’s standpoint is that the likes of Kohl’s and Target have massive share repurchase programs in place and yet the share price has not benefitted from the program. While reducing the share count, these retailers continue to miss EPS expectations and guidance.Such an anomaly further evidences the weakness in their brick and mortar business and how little their digital business efforts mitigates this weakness.Furthermore, these retail struggles are impacting brands at what some might argue to be peak-economic performance in the United States. As such, investors may need to reconsider or further consider the impact on these retail names in the event of a slight to prolonged economic slowdown. But for now, the reality is that most economists and media pundits are of the opinion the economy will strengthen through 2017, despite the recent holiday period hiccup. 

On Friday we also learned the U.S. economy’s expansion slowed in the fourth quarter, and annual growth failed to reach 3% for an 11th straight year.Gross domestic product expanded at a 1.9% annual clip from October to December, the Commerce Department said.For the full year, the U.S. grew just 1.6%, compared with its 2.6% clip in 2015. It was the weakest performance since 2011. Most economists believe the economy will grow around 2% or faster in 2017 under the Trump administration.

Digging into the latest GDP results we come to recognize where the underwhelming growth came from.Consumers increased spending by a strong 2.5%. Big-ticket items such as new cars and computers were the highlight during the period. Outlays on durable goods also surged by almost 11 percent. Additionally, businesses ratcheted up overall spending, including the first increase in equipment purchases in five quarters. 

Unfortunately, despite the underlying strength in the Q4 GDP results, it was of little benefit to the mentioned retailers.Keep in mind that every single named retailer had new initiatives initiated and implemented, double-digit online sales growth and streamlined operations through 2016.Nonetheless, the trend has been too strong and the lure away from brick and mortar too great from the likes of Amazon.com (AMZN), Wayfair (W) and the like.Whether or not the “brick & mortar bleed” has peaked or will begin to subside in 2017 is anybody’s guess, but the trend offers the greatest forecast. 

More recently I had authored an article regarding the recent struggles surrounding holiday sales from Target. In the article titled Target Lowers FY2016 Guidance After Dismal Holiday Period, I recap the struggles Target has been facing not just during the 2016 holiday period but throughout 2016.The most glaring benefit to Target’s share price in 2016 had been the share purchase program and the decision by management to lower guidance midway through the year. The retailer lowered guidance just enough to jump over that low bar in the Q3 2016 period. Even with that revision, the Q4 period guidance proved to be unachievable, forcing Target to once again lower FY16 expectations.

This shortcoming during the Q4 2016 and holiday period for Target has put great pressure on the share price that now rests around 12 X forward looking P/E (price to earnings). I’ve long since forecasted that shares of Target should and would trade at $65 a share based on the retailer's fundamentals, trending net sales performance and overall retail landscape. As that share price expectation has come to fruition, I also believed it would represent a greater risk/reward opportunity for traders, possibly even long-term investors even as long-term investors (2 years or so) have not been rewarded with profits.As such and even as shares of TGT blew through and below $65 a share, I acquired a small stake in the name at $64.35 a share. 

Target’s scale, market share, clean balance sheet, steady cash flow from operations, dividend of greater than 3.6% now and share repurchase program of $5bn have been a great lure for investors in 2016. Having said that, the risk/reward is that much more attractive at 12 X P/E than it was at 14 X P/E just a few months ago.With a small position in the name I believe the downside from Friday’s closing price of $63.70 is limited, but the upside is also limited. I’m not going to fool myself into believing shares will all of a sudden rise into the $70s near-term, nor do I plan to hold this position long-term.The fundamentals are still weak and presently there is no reason to believe that will change any time soon, especially given all the seemingly failed initiatives to drive growth during 2016.For the Golden Capital Portfolio I am simply seeking out a greater probability to profit from a mid-term, swing trade.I believe among the many retailers named in this publication, Target represents that opportunity to profit from a swing trade and with lesser risk.

Additionally, I am also willing to add to my original position in a disciplined manner. With the dividend yielding around 3.6%, I would be willing to add to my stake in TGT if the stock price dropped an equal amount of the dividend and from my original entry point. The math would be as follows:

• $64.35 X 3.6% = $2.31
• $64.35-$2.31 = $62.04

Based on the mathematical equation above that represents the equivalent yield percentage drop in share price from my original entry point, my next addition would be at $62.04 a share. Of course, like my decision to monitor the share price when shares exhibited $65, I would monitor the share price weakness if/when it achieves $62.04 for an entry, possibly lower.

Target has been in this position before whereby underperformance has been met with a rebound in sales and other metric performance.Having said that, the retailer hasn’t been confronted with what appears to be an outsized shift in consumer spending habits toward digital sales. Recently Ted Barac of Barac Capital Management offered his take on Target and the threat of online sales in an article titled Target: Expect More And Pay Less, Following The Sell-Off. 

While I agree with Barac’s overall thesis toward an investment or trade in TGT shares, I don’t agree with the following he offers:

Bricks-and-mortar stores also benefit from impulse purchases that on-line retailers don't. In that regard, I don't think there are many retailers that benefit from these impulse purchases as much as Target does (given their broad range of products). If you go to Target to buy a waste-paper-basket, you may come out with a dozen items that you didn't even realize that you needed when you went into the store.

The initial statement is true, based on all consequential studies over the last decade, but to the degree that it favors the retailers like Target is suspect to erroneous. In short, brick and mortar retailers only benefit from impulse purchase, like that pack of gum at the register or extra pair of socks in apparel, if the consumer goes to the store.The key issue with Barac’s offering is that consumers are less frequently visiting stores in favor of digital purchases. In truth, it has been a long time since the notion of impulse purchases has been beneficial to brick and mortar retailers. Where there is less foot traffic there are less impulse purchases and a lesser receipt amount. All of which have been reported by big-box retailers over the last several years.No, I’m sorry to say but the impulse purchase is not really a variable of benefit in today’s retail landscape.If and when the impulse purchase is made in-store, it hasn’t and likely won’t be able to compete with the strength in digital purchases.

Next week will be a busy trading week with a host of big names reporting Q4 2016 earnings results, including Amazon.com.The retail sector as a whole won’t be reporting for another few weeks. In between now and then, however, there is the probability that fears will subside surrounding a border adjustment tax to some degree. With retail names having been revalued over the last several weeks, a snap back or dead cat bounce may be on deck for these retail names. 

Last week, I participated in an interview with David Moadel regarding the retail sector.In this video I offer some of my thoughts on various retail names and the finer aspects of fundamental analysis vs. technical analysis. 

Also within the interview, I warn listeners about the vagaries surrounding technical analysis during periods of revaluation. I’m of the opinion that the retail sector has gone through a period of revaluation over the last several weeks and as many retail stocks have witnessed technical levels and other technical metrics fail to hold efficacy. Many retail names have been bound to the fundamentals, as they likely would be given recently updated fundamental results/updates.