It’s been a bumpy few days for the stock market, but not for Walmart (NYSE:WMT). In fact, Walmart stock is actually up since last Wednesday’s close, not down like a majority of stocks. Does that make Walmart stock a screaming buy?
Perhaps not a screaming buy, but it could be a buy as we gear up for the holiday season. As the fight intensifies between brick-and-mortar retail and ecommerce players, we’re seeing the winners separate from the losers.
The winners like Walmart, Target (NYSE:TGT), Kohl’s (NYSE:KSS) and TJX Companies (NYSE:TJX) are beefing up while the losers like Sears Holdings (NASDAQ:SHLD) and J.C. Penney (NYSE:JCP) continue to flutter toward zero.
This isn’t seen just with revenue, but also the stock prices. That leaves us wondering, are stocks like Walmart a buy going into year-end or should we take a pass on them?
Let’s look at some pros and cons.
Cons for Buying Walmart Stock
There are a few cons to consider for Walmart stock. Compared to companies like KSS, TJX, Home Depot (NYSE:HD) or Amazon (NASDAQ:AMZN), Walmart has painfully stifling growth. Expectations call for just 3% revenue growth this year and 2.9% in 2019. That’s despite the robust economic backdrop and the company’s various e-commerce efforts.
The earnings front isn’t much better. While estimates call for 9.3% growth this year, a lot of that can be attributed to the tax-cut bump. In 2019, estimates call for a 60 basis point decline in earnings. For this, investors are currently paying 19.6 times earnings. Not nauseatingly expensive, but far from cheap.
While Walmart does pay a 2.2% dividend yield, that’s now below what investors can collect on a one-year, two-year, five-year or ten-year Treasury note. As rates go up, as they’re likely to do, WMT’s yield will look less and less attractive.
Finally, retail is usually a big winner in the second half. There’s back-to-school sales in late summer, which are realizes in third-quarter earnings, then there’s holiday shopping in the last two months of the year.
However, the SPDR Retail Sector ETF (NYSEARCA:XRT) has been on fire through the summer, driving up many retail stocks already. Are they setting up as a sell-the-news event before the seasonally strong time of year? They might be, particularly as early forecast are calling tough holiday comps.
Pros for Buying WMT Stock
With all that said, there are some positives for Walmart stock. For starters, it’s the largest retailer in the country. So while the economy is doing well, the truth is Walmart draws in buyers in good times and bad. After all, people have to eat, right?
That’s one reason why Walmart has so many buy-and-hold investors on its roster. It’s also part of the reason why it can justify a valuation of nearly 20 times earnings.
The future of retail is a frightening thought. For fund managers who need sector exposure, looking for the best growth isn’t the only consideration; they need to know which ones will survive. While WMT is not exactly a growth company, it’s making a lot of necessary long-term investments to stay relevant in the decades to come.
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Further, while retail may be up big, WMT stock isn’t necessarily in that category. In Q2 and Q3, the XRT rose more than 18%, while the stock price climbed just over 9%. A big part of that jump occurred in August, when the retailer reported earnings.
All of this is to say that, while many retailers have gone on to make new highs (the XRT notched its 52-week high in mid-August) Walmart has not taken out its highs from January yet.
That brings us to the stock. Shares are now consolidating in a tight descending channel. A close over this channel could trigger a rally back to $100. Above that and its $108 highs are in sight.
A break below puts the 200-day and the $88-ish support level in play. Both can be buying opportunities.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held no positions in any stocks mentioned.
