The 3 Big Reasons to Stick With Walmart Stock in 2019

WMT stock is up big year-to-date, but the macro and micro fundamentals imply that this rally isn't over just yet

Against the backdrop of a stock market that is firing on all cylinders and surging to fresh all time highs,  Walmart (NYSE:WMT) stock has likewise been firing on all cylinders. In 2019, Walmart stock price is up a whopping 23%.

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That’s a big number. To put that 23% gain through a bit more than six and a half months in perspective, if Walmart stock price was flat for the rest of the year and closed 2019 up 23%, 2019 would still be the stock’s second best calendar year performance this century.

The sizzling performance from WMT stock comes despite the broader retail sector having struggled the whole year; the SPDR S&P Retail ETF (NYSEARCA:XRT) is up just 4% year-to-date. Meanwhile, Walmart stock is trading at a decade-high valuation of 23 times analysts’ average forward earnings estimate. Thus, one could very reasonably argue that retail stocks’ woes and an extended valuation will catch up to Walmart stock in the back half of 2019, and ultimately cause WMT stock to lose its gains from the first half of the year.

But this thesis is flawed for three major reasons. Those three huge reasons are as follows:

  1. Market and consumer economic fundamentals remain healthy, and support continued asset-price appreciation and healthy consumer spending for the foreseeable future.
  2. Walmart has separated itself from the rest of the retail pack, and will continue to post better-than-average numbers for the foreseeable future.
  3. Given the favorable backdrop and the company’s enhanced growth trajectory, WMT stock warrants its presently inflated valuation.

Consequently, I think the outperformance of Walmart stock will persist into the end of the year. I further believe that when all is said and done, Walmart stock price will be around $120 at the end of the year.

The Macro Fundamentals Are Favorable

The macro fundamentals supporting not just WMT stock, but all consumer-facing stocks, are healthy today and look poised to remain healthy for the foreseeable future.

Financial markets are heavily influenced by low real interest rates. As interest rates have crept lower in 2019, that has allowed equity yields to move lower, too, and stocks have benefited from significant multiple expansion in 2019. This dynamic will persist because the Fed now appears to be on a rate-cutting cycle which could last for several months. As long as this rate-cutting cycle remains in play, rates will remain low, and the market environment will remain risk-on and favorable for stocks.

On the economic side, all the “slowing growth” that everyone is talking about is happening on the manufacturing side (we appear to be heading into a manufacturing recession, mostly thanks to U.S.-China trade tensions). On the consumer side, though, everything remains fine. Unemployment rates are at record lows. Wage gains are running at decade-high levels. The savings rate remains high. Household debt isn’t a problem.Interest rates are low. Retail sales numbers have been strong. All of these favorable conditions should remain in play with the Fed now cutting rates, which should juice the economy and provide even more firepower to an already healthy U.S. consumer.

So market and economic conditions are presently very healthy for consumer-facing names like WMT stock, and should remain healthy for the foreseeable future.

Walmart Has Separated Itself From The Retail Pack

Although market and economic conditions have been healthy for consumer-facing stocks in 2019, certain consumer-facing stocks – namely, most retail stocks – have continued to struggle.

That’s because a majority of retailers are still struggling to keep up with the times. Many of them are attached to malls, which have continued to suffer from non-cyclical traffic declines. Many of them haven’t built robust e-commerce businesses. Indeed, some of them don’t even have an omni-channel presence. Most of them are also niche, don’t have the resources to compete with Amazon (NASDAQ:AMZN), and have failed to invest meaningfully in their businesses.

Walmart does not fall into any of those categories.

Walmart is an off-mall retailer. It has a huge e-commerce business that is growing at a 30%-plus pace. WMT has a big, rapidly expanding omni-channel business that includes pick-up in-store and delivery. The company is not niche; Walmart has basically become an all-in-one retailer where consumers can find everything from electronics to clothes to groceries – and it has more than enough resources to compete with anyone in the world. It’s taking those resources, and investing them back into its business through in-store remodels, enhanced web stores, and improved logistics.

All in all, Walmart has separated itself from the retail pack. This separation will enable Walmart to succeed going forward, even as other retailers may struggle.

Walmart Stock Is Worthy of Its Current Valuation

WMT stock presently trades at 23-times forward earnings. That is the biggest forward earnings multiple this stock has received over the past decade. Indeed, the current 23-forward multiple represents a 30%-plus premium to the stock’s five year average forward multiple of 17.5.

From this perspective, one could very reasonably argue that WMT stock is overvalued.

But that argument would misunderstand why investors have been willing to pay 23-times forward earnings for WMT stock today. The Walmart of today is much better than the Walmart of yesterday. Until recent years, Walmart had been a low-growth company with sluggish traffic trends, eroding margins, and strong competitive pressures from e-commerce. Today, though, Walmart is a faster growing company with healthy traffic trends, improving margins, and easing competitive pressures. The company is also innovating at a rapid pace, giving investors confidence that today’s improved trends will persist over the next several years.

Given these points, I reiterate that WMT stock is on track to close 2019 around $120, based on the idea that WMT’s revenue is poised to grow steadily, while it has healthy margin drivers and strong profit growth potential over the next few years.

The Bottom Line on WMT Stock

Walmart stock is up by a large amount this year. But its rally isn’t over. Over the course of the next six months, the market and economic environments will remain favorable, Walmart’s numbers will remain healthy, and WMT stock will continue to benefit from supercharged investor demand. This trio of tailwinds will ultimately propel Walmart stock close to $120 by the end of this year.

As of this writing, Luke Lango was long WMT and AMZN.


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