Despite Store Closings, Walmart Stock Is a Buy (WMT)

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News of Walmart (WMT) axing 260 stores worldwide may be ruffling a few feathers, but would-be WMT stock buyers shouldn’t let it dampen their zeal. The price action in Walmart stock has taken a turn for the better, and the recent stock market bloodbath makes it even more appealing, not less.

Let me begin by emphasizing the ultimate forward-looking indicator: price. You see, the price of WMT has already fallen some 30% from its all-time high of $90. At $62, it’s already returned to levels seen in 2008. So, say what you will about the store closings, and spin the news however bearish you dare, but keep in mind the stock has already taken a sizable haircut.

Of course, citing a stock’s recent shellacking alone as a reason to buy is foolhardy. What we really want to see is a turnaround in price — some confirmation that the long, dark night is over and buyers have finally mustered up enough courage to snatch-up a potential bargain. And Walmart stock has that evidence in spades.

For starters, how about the recent stock surge that carried the Walmart stock price above its one-year descending trend-line for the first time in a year? Or the fact that the surge was accompanied by the highest accumulation volume seen in WMT over the same time frame? And WMT’s 50-day moving average is rising for the first time since Walmart’s harrowing descent began, and the stock is finally back above both the 50-day and the 20-day average.

WMT stock
Source: OptionsAnalytix

The final piece of Walmart’s bullish case is the expected performance of consumer staples during market downturns. Consumer staple stocks — of which Walmart is the king — typically thrive, at least on a relative basis, when big, bad bears arrive to harass stock owners. Along with utilities and health care, consumer staples see capital inflows as traders scurry to areas they perceive are less likely to suffer from whatever is ailing the economy at the time.

An easy way to spot whether or not consumer staples are indeed shining is to look at the relative performance of the Consumer Staples SPDR (XLP) versus the Consumer Discretionary SPDR (XLY). As shown below, the ratio of XLP:XLY recently notched a new one-year high amid a rocket-like rise.

XLP-XLY
Source: StockCharts.com

The WMT Trade

Traders looking to accumulate shares of Walmart stock down here should consider selling puts. Why buy shares outright when someone is willing to pay you to buy them?

Sell the Feb $60 put for $1.00 or better. The potential reward is limited to the initial $1.00 and will be pocketed if Walmart stock price sits above $60 at expiration.

Should WMT fall below the $60 level by then, you will be obligated to buy shares — 100 for each contract sold. Since you scored $1.00 at trade entry your cost basis for the shares would end up being $59 which is about a 6% discount to the current price.

If you’d prefer to avoid buying shares, consider buying back the put to close the trade if Walmart stock falls below $60.

As of this writing, Tyler Craig owned short puts on WMT.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/01/walmart-stock-wmt-buy-store-closings/.

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