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Big box bets: Shopping for value at Target, Costco & Wal-Mart

A customer leaves a Costco store in Richmond, Calif.
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A customer leaves a Costco store in Richmond, Calif.

Target. Costco. Wal-Mart are considered the epicenter of big box retail activity in the United States.

Combined, these behemoth retailers operate over thirteen thousand stores, employ millions of people and are considered an important bellwether for the health of the U.S. economy

Wal-Mart alone returned $7.2 billion to shareholders last year in dividends and share repurchases.

Year-to-date, shares of Target are up 28 percent, Costco up 15 percent and Wal-Mart down 14 percent.

Oliver Chen, retail analyst at Cowen and Company, is bullish overall on the health of the sector.

Target: In stock and on-demand drives growth

Chen has an outperform on Target, with a price target at $92.00, up from $90.00.

"In stock and on-demand are driving growth," said Chen. "We're most excited by efforts to continue signature category momentum, on demand focus for consumers to pick-up anywhere with inventory allocation & retail 101 basics with improving in-stocks."

"We like the prospects for Target's turnaround driven by new leadership, reinvigorated product, omni-channel initiatives, decision to discontinue operations in Canada, and gradually improving results thus far."

Costco: Worth the premium

Chen is also bullish on Costco, with an outperform rating and a price target of $168.00, based on what he describes as a "best in breed" execution that is "worth the premium."

"We continue to view Costco as a core retail holding," said Chen. "We believe Costco is well positioned to continue delivering double-digit earnings growth over the near to medium term driven by square footage growth, steady membership revenue growth, and positive same-store sales comps."

Wal-Mart: Magic close, customers back

Chen is maintaining a market perform on Wal-Mart with a $77.00 price target, down from $83.00.

"The magic is close and customers are back, but elements need time," said Chen.

"We like Wal-Mart's global scale, extensive international growth opportunity, increasing focus on e-commerce and smaller neighborhood markets, and the company's status as a large-cap defensive stock."

"We believe improving U.S. comps and the health of the U.S. consumer will be key swing factors for the stock, but acknowledge growth investments in higher wages, training, and e-com infrastructure could limit EPS upside in 2015."

Cowen and Company, LLC and or its affiliates make a market in the stock of Costco Wholesale and Target securities. Chen and his family have no financial interest in Target, Costco or Wal-Mart.