Back in mid-October, shares of Walmart Stores Inc. (WMT) looked anything but buy-worthy. The world’s biggest retailer had just lowered its sales forecast for the full year and Walmart stock tumbled for more than 5% in just two days in response to the news. In fact, at the time, WMT was toying with a move to new 52-week lows.
A lot can happen in seven weeks though, and a lot did happen with Walmart.
The same Walmart stock that was hanging off the edge of a cliff then has since broken out of a multiyear rut, bullishly. While WMT may be a little intimidating to wade into here in the shadow of a two-month, 16% rally, a look at the bigger picture suggests more long-term upside is in store.
A Whole New Walmart
Yes, this is the same Walmart stock that before its most recently filed quarter had logged six straight declines in earnings, and failed to produce same-store sales growth in any of the previous seven quarters.
So what turned the market so bullish again so quickly? The same thing that always sparks such a fortuitous reversal — good reason to believe the way things were aren’t the way they are now.
The stock’s rebound technically started just after the big stumble in mid-October, but only sparingly, in response news that it would be closing 30 struggling stores in Japan and was instituting a price-matching program that would allow it to better compete with e-commerce giant Amazon.com, Inc. (AMZN).
Perhaps the biggest reason for new optimism came on Nov. 14, however — the day after the company’s most recent quarterly report was filed. Year-over-year earnings finally increased after a year and a half worth of deterioration. The company earned $1.15 per share, 3 cents better expected, and up from $1.14 a year earlier. It’s only a penny, but it was an important penny. Same-store sales were up too, by 0.5%. Revenues finally grew as well, by 2.9%, to $119 billion.
None of the improvements were heroic, but for a company that had been struggling for well over a year, it was just the breath of fresh air Walmart stock needed.
The proverbial cherry on top of this revival may well have come Monday of this week. That’s when Walmart reportedly broke its record for single-day online sales; shoppers collectively viewed more than 1.5 billion pages between Thanksgiving and Cyber Monday at Walmart.com.
Though no other details were provided regarding online sales, record-breaking traffic in the midst of massive online competition from the likes of Amazon.com and eBay Inc (EBAY) underscored the idea that Walmart shored up one of its glaring e-commerce shortcomings.
Said in simpler terms, within just the past couple of months Walmart has turned the proverbial corner, at least in investors’ eyes.
Handicapping WMT Stock
With all of that being said, the real story with Walmart stock at this point is the stores’ overhaul. It’s the chart of WMT, which may well be in the midst of a long-term rally.
As this weekly chart of Walmart illustrates, shares had been stuck in a range between $73 and $80 since early 2013. After several tests if both the floor and the ceiling, the bulls finally took charge in early November and yanked WMT out of the rut in a bullish direction.
How far might this move travel? For some perspective on the matter, it might be worth a look back to the period between 2009 and 2011 when WMT stuck in a range between $48 and $56. Once the bulls were ready to roll by late 2011, they didn’t stop until Walmart stock was trading at $75 nearly year later. That’s a 19-point, 34% advance over the course of a year or so.
As they say, past performance is never a guarantee of future results, but the move then is encouraging now. On the other hand …
Walmart Stock: Right Stock, Wrong Time?
While the technicals are positive and the turnaround story looks built to last, caution is still advised for those looking to pile in today. When the previous breakout materialized in late-2011, the trailing price-to-earnings ratio (P/E) was a mere 13.0. As of today, the trailing P/E is a much frothier 18.0. It’s not necessarily a reason to not invest in WMT right now, but a would-be investor should understand at that valuation it could take a year or more for Walmart stock to grow into a more palatable valuation.
Whatever the case, WMT is relevant again, and that’s something nobody was saying just two months ago.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
