I know I won’t win any popularity contests for today’s write-up. Yesterday, we saw an incredible move up from the largest private employer on the planet. Today I want to short the notion that Wal-Mart Stores Inc (NYSE:WMT) can sustain this rally for much longer.
Before you judge me as a perma-bear, most of my trades on WMT have been bullish. But at these levels, even with the $20 billion in buybacks on the horizon, I think there’s a good chance of a pullback in the stock.
Even then, I’m not calling for a complete correction, nor am I dissing the company. I am merely trading the short-term price action as I see it.
I read “expert” opinion suggesting to consider WMT from a tech company perspective, and that is a notion that I reject. I shop at their stores often, and it is still the no-frills store that it has always been. Help is still sub-par and shelves are not stocked properly. Forget about getting technical help from the technology departments.
This is not a bad thing, as it is its shtick.
Until those things change, WMT is still the low-price leader! Shifting sales online doesn’t make it a tech company. It has miles to go before showing overall growth worthy of a tech label. The whole pie has to grow, and not just the online slice, else there would be cannibalization.
To make matters worse it is not the only low margin operator anymore. The title of king of low margins is now Amazon.com, Inc. (NASDAQ:AMZN) and it’s gunning for WMT. Let’s not also forget Costco Wholesale Corporation (NASDAQ:COST).
As I said earlier, I am not bearish WMT fundamentals. In fact I embrace them and I will use them today to mitigate my bearish risk. I will spend no money out of pocket to short the price action for the next few months. If I were bearish the company fundamentals I would short it out right.
If I were shorting the stock outright I would expose myself to unlimited losses for as long as WMT rallies. This is unacceptable risk to me, so instead I will use WMT options. There I can limit my maximum loss for better peace of mind.
Fundamentally, WMT is not expensive and has a trailing price-to-earnings ratio around 20 and a price-to-book of three. It also pays a dividend. Management has already told us that they will financial engineer support for the stock price.
Click to Enlarge Expectations often play a big role in price direction. In this case, Walmart stock is trading close to the average price target on Wall Street. But current price is out of balance inside the total range. There is much more downside to the low price target then the high. So experts on Wall Street will have to adjust their price ranges. I realize that this could bring a positive headlines of price target increases.
Technically, WMT stock is approaching the all-time high. The last time it entered this zone it failed miserably. This time could be different but I still believe that there is a chance that expectations are no longer realistic.
WMT Stock Trade Idea
The Bearish Bet: Buy WMT Dec $80/$77.50 debit puts spread for 40 cents. Here I need the price to fall through my spread for a chance to profit $2.
To eliminate my out of pocket expense I will sell downside risk against perceived value in WMT.
The Bank: Sell WMT Mar 2018 $70 put and collect 55 cents to open. This is a bullish bet that would more than offset my expense.
Taking both trades means that I am getting paid to short WMT. As long as the price stays above my put then any premium I recover from closing the bearish bet would be pure incremental profit. Ideally I want it to fall through my bearish position but not go below my sold puts.
Regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Learn how to generate income from options here. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.