Even if you’re not big on the physical retail space, you’ve got to like Walmart (NYSE:WMT). As the superpower of the segment, their footprint offers convenience to millions of shoppers. Additionally, Walmart stock has handled itself very well amid the threat of Amazon (NASDAQ:AMZN) and e-commerce. Thus, a temptation exists to treat the present volatility due to the coronavirus from China as a discount.
It’s easy to see why contrarians are so eager to pounce on shares. In 2019, Walmart stock returned over 32% for stakeholders. That was the case even with the heated U.S.-China trade war that only cooled toward the back end of the year. If that wasn’t enough to disrupt the share price, the thinking goes, why would the coronavirus be different?
More importantly, WMT made changes to its supply chain to accommodate the pressures resulting from the trade war. Thus, many analysts believe that the outbreak’s impact on Walmart stock is overstated. A few years ago, the retailing giant declared that two-thirds of its products are manufactured (or grown) in the U.S. Of the remaining one-third, China-based products accounted for 20%.
However, because of the trade war, this relatively limited exposure to China is likely even less. Again, it points to the thesis that Walmart stock is somewhat insulated from the coronavirus.
Further, Walmart CEO Doug McMillon stated that the company is managing the impact from the health crisis. While they acknowledge that they’ll take a hit in the first quarter, they’re keeping their stores open in China (but with reduced hours). McMillion justified the move, likening it to store accessibility during natural disasters.
However well-meaning, this confidence may be misplaced.
Walmart Stock Not Fully Priced in for the Coronavirus
Let me back up just a bit. My intention for writing about the coronavirus epidemic is not to spread panic. However, I think at this point, it’s truly disingenuous not to prepare for worst-case outcomes.
First, although this belief may rankle some of my fellow InvestorPlace writers, I believe it’s dangerous to compare the coronavirus to the flu. Although the flu has killed more people than the coronavirus (at least, as of now), the fatality rate is very small due to the massive number of people who are infected annually.
In contrast, the coronavirus is in another dimension. At time of writing, 80,425 people have been infected, with 2,712 deaths. Worryingly, this puts the fatality rate near 3.4%, steadily approaching SARS’ fatality rate of approximately 10%.
Bear in mind that SARS only infected roughly 8,000 people worldwide after seven or eight months. Therefore, the present crisis could easily become a pandemic.
Don’t believe me? Consider the case of South Korea. According to the New York Times, the country reported 977 cases. It is now the second-worst hit region outside of China. Seemingly overnight, it surpassed the Diamond Princess cruise liner fiasco, which counted 691 cases.
Let’s use some logic here. When the Diamond Princess was first stricken, government officials lacked information about the coronavirus. Clearly, the virus spreads rapidly in confined spaces. But South Korea is an open country. Yet even in this environment (with obviously free-flowing as opposed to recycled air), South Korea dubiously surpassed the cruise liner.
Pouring salt on festering wounds, Italy now has 323 cases, slightly more than double Japan’s tally. This too come out of nowhere.
I’m sorry folks, but we are not taking this crisis seriously. It will almost certainly impact Walmart stock negatively.
Not Panic, but Common Sense
Ultimately, I view this rapidly deteriorating situation as a “keep the powder key dry” moment. Sure, contrarians are trained to jump on red ink like no one’s business. Sometimes, that’s a smart move: be greedy when others are fearful and all that jazz.
However, with Walmart stock and similar blue-chip names, I believe the better tactic is to wait. If the markets rebound because the coronavirus turned out to be BS, you may lose some opportunity costs. But if this virus is worse than advertised – the evidence suggests that’s the case – we could see a painful deterioration.
Don’t get me wrong: I like Walmart stock for the long run. But for now, the risk-reward picture favors the cautious approach.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.