Best Stock to Buy Right Now: Target vs. Kohl's

The stock market had a good year in 2025, with the S&P 500 index producing a total return of 17.9%. However, with consumers facing various economic challenges, the retail sector didn't fare as well. The S&P 500 Retail Composite returned 5.6% during that period.

For investors looking for value stocks, the retail sector could make for a fertile hunting ground. Two stocks that have seen their share prices drop are Target (NYSE: TGT) and Kohl's (NYSE: KSS).

Does one warrant an investment over the other, or should you pass on both? It's time to understand each company better.

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Target

Target became a popular shopping destination by offering exclusive brands. The strategy allowed the company to differentiate itself from other retailers.

Recently, Target's sales have been sluggish, however. Fiscal third-quarter same-store sales (comps) dropped 2.7%. Lower traffic accounted for the majority of the drop, 2.2 percentage points, and decreased spending was responsible for the balance of the sales decline. The quarter ended on Nov. 1.

Target has been confronting several issues. These include merchandise missteps by management and consumers stressed by persistent inflation for everyday items that has cut into discretionary spending.

While it's difficult to predict when inflation will abate and better economic times will come, the cycle will turn at some point. To me, the company getting away from its core merchandising strategy represents the bigger challenge.

However, the company's incoming CEO, Michael Fiddelke, has promised changes. The current COO, who will officially take the reins on Feb. 1, wants to return to a differentiated merchandising strategy, update stores, and make technology investments. These should resonate with customers and improve their experience.

Target's comps have undoubtedly also been hurt by boycotts after management decided to roll back diversity, equity, and inclusion initiatives. It has reached out to community groups in an effort to stem the damage.

Meanwhile, the stock price sagged 26% over the past year, well below the S&P 500 index's 15.4% gain. However, the lower stock price has created a more attractive valuation for patient investors. Target's shares have a price-to-earnings (P/E) ratio of 12 compared to 14 a year ago. The S&P 500 trades at a much richer P/E multiple of 31.

Kohl's

Kohl's has had a difficult few years, and shareholders have felt the effects. Over the last five years, the share price lost about 48% while the S&P 500 gained some 83%.

However, the share price rallied last year, jumping 51%. That's partly due to Kohl's becoming a meme stock. These become popular on social media sites, such as Reddit, and prices increase as retail investors pile into the stock.

But that's not a reason to buy the stock. You should only make an investment based on analyzing a company's long-term prospects. Kohl's sales have struggled as its goods haven't resonated with consumers. For the first nine months of the fiscal year (ended Nov. 1), its comps dropped 3.2%, and management expects a 3.5% to 4% decrease for the year.

In late November, the board of directors named interim CEO Michael Bender the permanent CEO. Kohl's has cycled through four CEOs in as many years. It's challenging to turn around a retail business and next to impossible when leadership constantly changes. Still, it's unclear how Bender will reverse the sales decline.

Kohl's stock valuation has become richer over the past year, although it remains cheaper than the overall market. The shares have a P/E ratio of 13, more than double the year-ago P/E ratio of 6. Still, the current P/E ratio is less than half that of the S&P 500.

The better investment choice

Given Kohl's lack of direction and years-long sales slump, it faces an uphill battle to reverse the decline. Other than discounts, it hasn't found a way to increase traffic. To me, the stock has the makings of a value trap.

I'm much more optimistic about Target's long-term prospects. I believe returning to its roots will once again attract customers looking for its unique and special goods. Patient investors willing to wait for the strategy to take hold and economic conditions to improve will likely get rewarded handsomely.

That makes Target the hands-down better stock to buy.

Lawrence Rothman, CFA has positions in Target. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.