Walmart (NYSE:WMT) will report earnings on Aug. 15 before the market opens. When WMT stock has strong technical momentum, it tends to do quite well on a pre-earnings run into the report. For Walmart stock, that puts the trade in play this week, even though the company’s quarterly results won’t hit the tape until mid-August.
What’s so nice about playing pre-earnings trades? First, we use options so our risk is completely defined. Second, this trade has a high rate of success.
Working even more in Walmart’s favor is the fact that the company has been doing incredibly well as of late. Shares are up 20% so far on the year. That’s about in-line with the SPDR S&P 500 ETF (NYSEARCA:SPY). Also, it’s almost 400 basis points higher than the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA).
Over the past year, WMT stock is up more than 26%. This has more than tripled both the SPY and DIA performance over that time.
Trading Walmart Stock
The Walmart stock price has been holding up near the $112 level for more than a week now. Admittedly, shares are below the 20-day moving average now. However, consolidating a modest pullback from the highs is attractive at this point.
Walmart is among a group of retailers that are actually doing quite well right now and holding off Amazon (NASDAQ:AMZN). A few of the others include Home Depot (NYSE:HD), Costco (NASDAQ:COST) and Target (NYSE:TGT). As a result, these names have become buy-on-dips candidates. And a dip is exactly what we have in the Walmart stock price.
Shares are holding over the backside of prior channel resistance (blue line). Should WMT stock fall below this mark, the next reasonable mark of support is the 50-day moving average. On a larger correction, Walmart stock should find support on a test of the $103 to $104 area.
Not only was this area a big breakout zone from the last few quarters, but the 38.2% retracement for the one-year range comes into play at $104.14.
Pre-Earnings Play in WMT Stock
Let me first start by saying that only traders comfortable with options should be using these tools as a means for trading and investing. I like to use call options in this case because I can leverage a very small amount of my portfolio (less than 1%) and look for outsized gains should it pan out.
That said, those that are comfortable can consider a two-week run up to the company’s report on Aug. 15. By definition, that means opening the trade today.
The parameters for the trade, found using Trade Machine, also include using options that expire as close to 30 days as possible, with a delta between 40 and 50. The parameters also constitute that the trade will not be initiated unless WMT stock is above its 50-day moving average. We will use a 40% stop-loss and a 40% gain as our exit on the trade. (The software calculates both the entry and the exit at the market close).
When these parameters are all satisfied, this trade has been successful three out of four times (75%) in the past year. Over the past two years, this trade has been successful six out of seven times (85.7%). And over the past three years, the trade has been a winner seven out of nine times (77.8%).
Of course, past performance does not guarantee future returns. But by leveraging options on a small amount of portfolio capital, we are simply playing the odds. Just because the odds are in our favor does not mean we will win. But it’s certainly better than throwing darts.
Final Thoughts on Walmart
Walmart stock is one of retail’s anointed names. That’s probably because the company is one of the few that has the money and logistics to adapt to the industry’s e-commerce and omni-channel changes. It lacks the growth of TGT, HD, COST and certainly AMZN, but it will be around for decades to come.
Analysts expect just 2.4% revenue growth this year but call for an acceleration to 3.3% growth next year. On the earnings front, they expect a 1.6% decline this year, but 4.6% growth in 2020 (fiscal 2021).
Last quarter, the company printed a strong 3.4% comp-store sales number. While growth isn’t robust for WMT stock right now, the consumer is doing quite well. The recent GDP report highlighted strong consumer spending, offsetting the lack of business investment in the economy.
That should bode well for Walmart stock, at least in sentiment ahead of the numbers.