Forget Walmart and Target, shop this underrated stock instead

Walmart (WMT 1.06%) and Aim (TGT 0.13%) they are two of the best retailers in the country and can make big long-term investments as the economy grows. But Walmart is trading at a 52-week high, and its valuation is expensive. Target, meanwhile, is mostly a discretionary piece, and while it’s coming off a decent quarter, it expects minimal growth this year.

With both of these stocks, you are taking on some risk, ultimately tying yourself back to their respective growth rates. Walmart’s valuation could hurt if its growth rate doesn’t stay high, and Target may not be the bargain buy it appears to be without better sales numbers.

Instead of taking a chance on these two stocks, there’s a potentially better option for you to consider, and that’s it The TJX Companies (TJX -0.09%).

TJX’s growth rate is comparable to Walmart’s and better than Target’s

TJX owns several brands, including HomeGoods, Marshalls and TJ Maxx. The off-price retailer can make for an attractive discretionary stock to own because off-price clothing and other products can provide consumers with a way to hunt for bargains even in tough economic conditions.

On Aug. 21, TJX reported earnings for its latest quarter, which ended Aug. 3, and its comparable-store sales rose 4 percent — which was above expectations. The company says this was primarily due to an increase in customer transactions (as opposed to higher prices).

That’s a similar rate to Walmart, which reported comparable US sales growth of 4.2% (for the period ended July 26). The big-box retailer also sells a wider variety of products than TJX, and groceries make up a large portion of its sales.

Meanwhile, Target generated comparable sales growth of 2% (in the same period as TJX), which was at the top of its expectations. However, the company believes that number will fall to the lower end of its 0% to 2% range for the full fiscal year (ending in January). This likely indicates that the recent strong quarter does not indicate a more optimistic overall market trend.

Investors get bang for their buck with TJX

Neither Walmart nor Target provided results that suggested they were doing exceptionally better than TJX. And that makes TJX attractive given its current price-to-earnings (P/E) multiple, which sits between that of the other two stocks.

TJX PE Report Data by YCharts.

True, Target is trading at a deep discount to its two peers right now. But given the lackluster growth rate and the possibility of further declines in the future (especially as its buyers may find TJX’s lower-priced products more attractive amid worsening economic conditions), the discount may be justified.

TJX is a good buy now and for the long term

It can be tempting and easy to go with Walmart’s stock right now. The business is doing well and growing and is a familiar brand. But with TJX, investors can get more value for their money in a better-rated stock. Despite its strong results, it hasn’t been as hot as Walmart has been — TJX is up 30% this year, while Walmart is up 45% (target is up about 12%).

Instead of paying a huge multiple for Walmart or taking a chance on Target and its sluggish growth, investors should consider buying TJX stock right now. The company’s brands attract discount shoppers, and that can make it a good growth investment to hold even if economic conditions worsen in the near future. And at a relatively modest valuation, investors don’t have to worry about paying too much of a premium for the business.