Let’s cut to the chase. When it comes to Walmart (NYSE:WMT), I think there are two big reasons why owning Walmart stock here and now makes sense.
First, despite the chatter, there is a strong chance that the U.S. economy does not head into a recession anytime soon. If it doesn’t, that means that the U.S. labor and consumer markets will remain healthy, and retail sales will continue to trend higher.
Walmart has established itself as an irreplaceable and important player in the retail market, so as U.S. retail sales climb higher over the next few quarters, Walmart’s sales and profits will also rise. And as those trend higher, so will Walmart stock, because the stock is reasonably valued at current levels.
Second, there is a small chance that the U.S. economy plunges into a recession soon. If it does, WMT will be just fine, since its low-cost value prop tends to stand out more during a recession, and the stores get busier, not emptier. As such, even if retail sales do broadly get hit over the next few quarters, Walmart’s sales won’t. Neither will profits. Or WMT stock.
The big picture? One of two things will happen over the next twelve months. Either the U.S. economy will head into a recession, or it won’t. In either scenario, WMT stock will be just fine.
The same can be said for only a handful of stocks. As such, at current levels and at the current moment, Walmart stock looks like both a good and safe investment.
Why Walmart Stock Is a Good Investment
The most likely path forward for the U.S. economy is steady growth, and if that most likely path comes to fruition, then Walmart stock will trend higher over the next few quarters.
Here’s the logic. The U.S. economy has slowed meaningfully over the past few quarters amid escalating global trade tensions. But, this slowdown is almost entirely due to a rise in corporate uncertainty, which has caused a drag on capex and capex-dependent industries. If corporate confidence turns around, so will the economy.
It could — and soon — as it appears that the trade war is de-escalating. This de-escalation — coupled with significant central bank stimulus — should keep the U.S. economy on a healthy growth trajectory for the foreseeable future. If the U.S. economy remains on a healthy growth trajectory, so will the retail market, since the U.S. economy is driven almost entirely by consumers and their spending.
Let’s say the U.S. retail sales market does continue to grow at a healthy 3-4% pace over the next few quarters. In that scenario, Walmart will sustain 3-4% comparable sales growth, since this company has successfully leveraged omni-channel expansion to turn into an all-in-one, low-cost retailer with unparalleled convenience, reach and resources. Sustained comparable sales growth in that range, coupled with some upside margin drivers as heavy DTC investments phase out, should drive steady mid-to-high single earnings-per-share growth over the next few years.
Walmart stock trades at a largely average and very reasonable 24-times forward price-to-earnings ratio. Thus, no valuation adjustment is needed here. Share price growth should coincide one-to-one with profit growth. The implication? If the U.S. economy doesn’t head into a recession, Walmart stock should rise by a steady 6-10% per year, and it should maintain a nice and stable yield. That return profile makes the WMT stock price attractive here.
WMT Stock Is Safe Too
As mentioned before, there’s also a chance that the U.S. economy does plunge into a recession within the next 12 months. But, even if it does, Walmart stock will be just fine.
The logic here is equally simple. Walmart has two core value props in the retail market. One, they offer the lowest prices in the game. Two, they offer the highest convenience in the game. The former value prop becomes increasingly important to consumers when money becomes tight, as it does during a recession. Thus, while U.S. retail sales will drop in the event of a recession over the next few quarters, Walmart’s sales won’t, because they will grow market share as customers flee from Nordstrom (NYSE:JWN), Target (NYSE:TGT), Whole Foods and Best Buy (NYSE:BBY) to shop at much-cheaper Walmart stores.
This is more than just a theory. History says it’s what actually happens. Look back at the last recession. From the market’s peak in 2007 to its trough in 2009, the S&P 500 plunged. Walmart stock? It rose over that same stretch.
The implication? Even if the U.S. economy does spiral into a recession over the next 12 months and stocks crash, Walmart stock could very well be just fine.
Bottom Line on WMT Stock
No matter which way the economy goes, Walmart stock should be just fine. Very few stocks can say the same. Because of this, WMT stock looks like both a good and a safe investment at current levels.
As of this writing, Luke Lango was long WMT, TGT and BBY.
