Investors Finally Give WMT the Green Light

by James Brumley | May 24, 2012 5:30 am

It might have taken 12 years, but it was worth the wait. After being stuck in a trading range since the year 2000, Wal-Mart (NYSE:WMT[1]) shares finally are rolling again. As such, traders can move the world’s biggest retailer’s stock from the “stodgy dead money” bin to the “it’s a player” bin. Seriously.

What’s even more amazing is how WMT stock genuinely deserves the newly mustered interest, even in the face of some embarrassing problems.

Finally!

Walmart 300x244 Investors Finally Give WMT the Green Light
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Although many had left Wal-Mart for dead years ago because it seemed perpetually stuck in a range between $42.30 and $63.85, the recent rally from WMT has breathed new life into an old stock. Wednesday’s close at $64.58 is the highest the stock has been since briefly peaking at $69 in January 2000.

Perhaps more important, the current dance with the $64 area doesn’t quite feel like the last two times WMT toyed with a break above a big ceiling, both of which failed and ultimately sent the stock back to $43.20. This time around, Wal-Mart shares have a healthy degree of sustainable momentum; few are calling it “overbought.”

Indeed, when investors stand back and look at the whole picture, the story actually is quite logical — earnings have been consistently on the rise since 2000, only stumbling modestly in 2008. The stock should be rising over time, reflective of the growing bottom line. The only real surprise should be that it took this long for shares to get up and go.

Yet, the whole thing prompts another question: If earnings have been in the rise and the stock was stagnant anyway, what got investors past the mental roadblock of choosing not to reward the stock despite the company’s success?

This is where it gets really interesting.

A Multi-Pronged Overhaul

It might not be rational, but investors (even the institutions and so-called “smart money”) make choices based on feelings rather than proven results. Wal-Mart was no exception to this reality. While Wal-Mart’s reliable — almost creepy — income growth is top-notch, would-be buyers of the retailer simply couldn’t get past its non-fiscal tripwires.

Nagging labor problems are one of those stumbling blocks. Gender discrimination, unpaid work time and miserable benefit plans have been some of the chief complaints about working for the retailer.

Then there’s concern Wal-Mart is poised to ultimately lose to more focused and better-executed competition. Take Target (NYSE:TGT[2]) for instance. The two retailers go head-to-head in terms of price on most everyday items, but there’s little doubt that Target’s “Cheap Chic” has made it a top-of-mind choice when shopping for value-priced apparel. In a similar vein, though many Wal-Marts now offer groceries, few of them have been viewed as a better grocer (or a lower-priced grocer) than fully focused grocery stores like Kroger (NYSE:KR[3]).

Then there’s the stores themselves. A big chunk of them look like they were built in the ’80s and early ’90s. That’s because they were, and haven’t been touched since. Several of them also look like they haven’t been cleaned since the ’80s or early ’90s.

These are all details potential investors can’t just shrug off, which might explain at least part of the reason the stock has been stuck in the mud for more than a decade.

Well, guess what — things are changing. The change has been gradual, almost to the point of being imperceptible, but the retailer finally has started to win back some of its ’90s street cred. Investors have started to notice, too.

Not Yesteryear’s Wal-Mart

Labor issues? Though the echoes of those problems still are ringing, the corporate culture is evolving (following a multimillion-dollar suit[4]) on that front.

Competition? Target’s still winning the “cheap chic” war, but Wal-Mart has figured out that if it wants to really do well in the grocery business, it has to get better. And it is. The company has borrowed a page or two from Whole Foods Market (NASDAQ:WFM[5]) by introducing organic food and healthy choices[6] in its grocery aisles, and has found good success with it so far.

Dated stores? Though it’s the biggest and costliest undertaking among these three, it’s also happening — it’s just happening in stages.

Though the overhaul isn’t finished, the company is off to a great start.

And what about the black eye stemming from the recent bribery scandal in Mexico? The fallout is more bark than bite. Jim Woods makes a sadly accurate point[7] about the matter: It’s going to be forgotten in a matter of weeks.

Bottom line: Earnings growth was never the problem. The problems holding the stock back were all off the books. Now that those challenges are withering, the stock finally is getting its due. It’s a trend that could last awhile too, now that the ball’s rolling for all the right reasons.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Endnotes:
  1. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  2. TGT: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGT
  3. KR: http://studio-5.financialcontent.com/investplace/quote?Symbol=KR
  4. following a multimillion-dollar suit: http://www.eeoc.gov/eeoc/newsroom/release/8-18-11b.cfm
  5. WFM: http://studio-5.financialcontent.com/investplace/quote?Symbol=WFM
  6. introducing organic food and healthy choices: http://www.dailyfinance.com/2012/02/10/walmarts-new-health-food-push-is-it-too-hard-to-swallow/
  7. Jim Woods makes a sadly accurate point: http://investorplace.com/2012/04/wal-marts-mexican-bribe-scandal-laughable/

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