Now THAT my friends is some Grade-A Wall Street Value-add! If by chance you have been following Wal-Mart's (WMT) stock price recently, you will see that it is at a 4-year HIGH, and that this analyst missed the 35% gain since August 2007 - but better late than never I guess, so today it's a BUY!
Let me see - is it "buy high sell low"... ? Or maybe it's "sell low, ignore higher, buy high"! That's what Merrill's crack "analyst"seems to think. If you take a peak at the chart in the back of the report, the one required now in the back of every analyst report, you can see a history of the analyst's ratings on the stock. Here is how this analyst did:
Dec. 6 2005 - ratings upgrade from Neutral to Buy, stock price 47.62
18 July 2006 - rating downgrade to Neutral, stock price 43.17, stock LOST 9.3% while rated buy vs. S&P500 loss of 2.1%
16 March 2007 - upgrade to Buy, stock price 46.21, a GAIN of 7% while rated neutral vs. S&P500 gain of 12.1%%
14 August 2007 - downgrade to Neutral, stock price 43.82, a LOSS of 5.2% while rated buy vs. S&P500 loss of 2.9%
30 August 2007 - downgrade to Sell, stock price 43.32, loss of 1.1% while rated neutral vs. S&P500 gain of 2%
26 Oct 2007 - Upgrade to Neutral, stock price 44.64, gain of 3% while rated sell vs. S&P500 gain of 5.3%
April 25 2008 - upgrade to Buy, stock price 57.45, GAIN of 28.7% while rated neutral vs. S&P500 loss of 9.4%
Summary:
While rated BUY, the stock LOST 9.3% and 5.2%
While rated NEUTRAL, the stock gained 7%, lost 1.1%, and gained 28.7%
While rated SELL the stock GAINED 3%
One heck of a record! The fact that she just upgraded to BUY is making me take a closer look at my WMT holdings. I trimmed a little recently in a managed account that was overweight, but continue to hold in other accounts. I think it is nearing fair value at current levels, so I am considering trimming further.
What this points out however is that much of Wall Street's ratings "upgrades" and "downgrades" are nothing more that backward looking momentum calls or shallow extrapolation of recent trends. The only value they create is for themselves in the form of commissions generated from speculative trading activity.
Just another example of why we should avoid the noise, and simply buy good companies when they look cheap and sell them when they look expensive.
_____________________
[www.vestopia.com]
By Todd Kenyon PhD CFA: Nobadeer Capital Management, LLC
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1. Cm1750 says on Apr 26, 2008 at 10:04 PM:
Another example - JP Morgan just upgraded consumer discretionary after they had a big run recently. For the most part, the sell-side is completely useless in terms of recommendations. Those who can't invest....write reports.
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2. Cm1750 says on Apr 27, 2008 at 1:05 PM:
INVESTORS' SOAPBOX PM
J.P. Morgan Securities
WE ARE UPGRADING THE Consumer Discretionary Sector to a cautious Overweight (up 100 basis points) from Underweight (previously, down 400 basis points).
Previously, we had been significantly underweight the U.S. consumer (Staples Sector is still down 400 basis points, underweight). After all, the U.S. consumer is facing considerable headwinds, from the asset bust in housing, a credit crunch, higher energy and commodity costs, and the prospect of rising unemployment. We believe this could be a short-term trading opportunity.
Tax rebates could be reaching consumers faster than expected, as a larger share will be transferred electronically. The average rebate is expected to be $1,800 per family, substantially larger than past rebates.
Retailers are beginning to gear up to amplify the impact of rebates (matching rebates, or 10% bonus, etc). As we noted in a past, prior tax rebates had a meaningful impact on consumer spending.
The House Financial Services Committee is planning to vote on the [Barney] Frank (D-MA) proposal to fund the Federal Housing Administration with $300 billion, with a possible floor vote by Memorial Day. This bill could reliquify the mortgage market and likely mitigate the decline in home prices. Tom Block, JPMorgan's Washington Strategist, believes the FHA elements of this bill could be voted on by the Senate before the summer recess.
U.S. births reached 4.3 million in 2006, the highest level since 1961 and the third largest in the history of the U.S. The life cycle of these consumers should be positive for retailers.
Beyond fundamentals, we are seeing some technical and valuation reasons to become more constructive. Discretionary's Monthly relative strength index (RSI) (relative to S&P 500) is at 25, a deeply oversold level and associated in the past with strong outperformance versus S&P 500 by 840 basis points over the next year. The Relative last 12 months price/earnings multiple is now 90% of the S&P 500, in the lowest decile P/Es (since 1973).
First Call Mean rating is at the lowest (versus S&P 500) in the past decade. Short Interest (DTC) is now 1.0 days above the S&P 500, a level last seen in 1994.
-- Thomas J. Lee, CFA
-- Bhupinder Singh
-- Jonathan W McCullough, CFA
J.P. Morgan Securities
WE ARE UPGRADING THE Consumer Discretionary Sector to a cautious Overweight (up 100 basis points) from Underweight (previously, down 400 basis points).
Previously, we had been significantly underweight the U.S. consumer (Staples Sector is still down 400 basis points, underweight). After all, the U.S. consumer is facing considerable headwinds, from the asset bust in housing, a credit crunch, higher energy and commodity costs, and the prospect of rising unemployment. We believe this could be a short-term trading opportunity.
Tax rebates could be reaching consumers faster than expected, as a larger share will be transferred electronically. The average rebate is expected to be $1,800 per family, substantially larger than past rebates.
Retailers are beginning to gear up to amplify the impact of rebates (matching rebates, or 10% bonus, etc). As we noted in a past, prior tax rebates had a meaningful impact on consumer spending.
The House Financial Services Committee is planning to vote on the [Barney] Frank (D-MA) proposal to fund the Federal Housing Administration with $300 billion, with a possible floor vote by Memorial Day. This bill could reliquify the mortgage market and likely mitigate the decline in home prices. Tom Block, JPMorgan's Washington Strategist, believes the FHA elements of this bill could be voted on by the Senate before the summer recess.
U.S. births reached 4.3 million in 2006, the highest level since 1961 and the third largest in the history of the U.S. The life cycle of these consumers should be positive for retailers.
Beyond fundamentals, we are seeing some technical and valuation reasons to become more constructive. Discretionary's Monthly relative strength index (RSI) (relative to S&P 500) is at 25, a deeply oversold level and associated in the past with strong outperformance versus S&P 500 by 840 basis points over the next year. The Relative last 12 months price/earnings multiple is now 90% of the S&P 500, in the lowest decile P/Es (since 1973).
First Call Mean rating is at the lowest (versus S&P 500) in the past decade. Short Interest (DTC) is now 1.0 days above the S&P 500, a level last seen in 1994.
-- Thomas J. Lee, CFA
-- Bhupinder Singh
-- Jonathan W McCullough, CFA
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3. Stockdocx99 says on Apr 27, 2008 at 1:31 PM:
WalMart is yet another example that illustrates why VALUATION is the key to stock selection.
At its all-time high of $70.30 in December 1999 WMT was just finishing a FY with $1.28 in EPS. It had a current year P/E of 54.9x. Way too expensive compared to prior average annual P/Es for WMT of 20x - 39x. Buyers at the high were paying about twice WMT's prior 10-year median P/E.
Even though EPS hit new records in every one of the next 8 years [going from $1.28 to FY 2007's $3.17] the shares trended lower until bottoming last September at $42.10.
At that September 2007 low WMT shares were trading for just 13.3x FY 2007 earnings. That was the lowest P/E for WMT shares EVER. Buyers last September were getting a huge discount to WMT's prior 10-year median P/E.
It's not surprising that buyers of WMT when the P/E was too high did horribly even when the macro-environment from 1999 through mid-2007 was good and the earnings per share more than doubled.
It also was predictable that buyers of WMT last September [when the shares were at their lowest P/E EVER] did well despite a horrible macro-environment and a horrendous stock market from that point through today.
Shares are up about 35% since then simply because of regression towards a more normal valuation. At Friday's close WMT shares are now at 18.2x trailing earnings- about their average levels of the past four years.
At its all-time high of $70.30 in December 1999 WMT was just finishing a FY with $1.28 in EPS. It had a current year P/E of 54.9x. Way too expensive compared to prior average annual P/Es for WMT of 20x - 39x. Buyers at the high were paying about twice WMT's prior 10-year median P/E.
Even though EPS hit new records in every one of the next 8 years [going from $1.28 to FY 2007's $3.17] the shares trended lower until bottoming last September at $42.10.
At that September 2007 low WMT shares were trading for just 13.3x FY 2007 earnings. That was the lowest P/E for WMT shares EVER. Buyers last September were getting a huge discount to WMT's prior 10-year median P/E.
It's not surprising that buyers of WMT when the P/E was too high did horribly even when the macro-environment from 1999 through mid-2007 was good and the earnings per share more than doubled.
It also was predictable that buyers of WMT last September [when the shares were at their lowest P/E EVER] did well despite a horrible macro-environment and a horrendous stock market from that point through today.
Shares are up about 35% since then simply because of regression towards a more normal valuation. At Friday's close WMT shares are now at 18.2x trailing earnings- about their average levels of the past four years.
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4. DaveinHackensack says on Apr 27, 2008 at 3:51 PM:
Stockdoxc,
Doesn't your comment above also highlight the danger of putting too much weight on the historic average P/E ratios for a particular stock? As you note above, a P/E of 50x+ for Wal-Mart in 1999 looked high based on its historic average P/E range of "20x - 39x". Relying on that historic P/E range, couldn't you have made an argument for buying WMT later at, say, 25x trailing earnings? What you would have missed, it seems, is the multiple compression warranted by Wal-Mart's declining growth prospects as the company saturated the U.S. market and ran into difficulties expanding in first world markets overseas (e.g., in Germany and Japan).
Our former commenter BillyTickets deserves credit for betting right and buying WMT at under $44 last summer. So do a few current commenters who bought around the same time -- Buffetteer and Vooch come to mind, but if I've forgotten others, I apologize. At the time I was too lukewarm about WMT's future growth prospects (particularly its difficulties in first world markets overseas) to consider buying it. I'm still lukewarm on those future growth prospects, but I think WMT is currently benefiting from a macro-trend in the U.S.: more American consumers having to resort to shopping at Wal-Mart because of rising gas and other costs.
Doesn't your comment above also highlight the danger of putting too much weight on the historic average P/E ratios for a particular stock? As you note above, a P/E of 50x+ for Wal-Mart in 1999 looked high based on its historic average P/E range of "20x - 39x". Relying on that historic P/E range, couldn't you have made an argument for buying WMT later at, say, 25x trailing earnings? What you would have missed, it seems, is the multiple compression warranted by Wal-Mart's declining growth prospects as the company saturated the U.S. market and ran into difficulties expanding in first world markets overseas (e.g., in Germany and Japan).
Our former commenter BillyTickets deserves credit for betting right and buying WMT at under $44 last summer. So do a few current commenters who bought around the same time -- Buffetteer and Vooch come to mind, but if I've forgotten others, I apologize. At the time I was too lukewarm about WMT's future growth prospects (particularly its difficulties in first world markets overseas) to consider buying it. I'm still lukewarm on those future growth prospects, but I think WMT is currently benefiting from a macro-trend in the U.S.: more American consumers having to resort to shopping at Wal-Mart because of rising gas and other costs.
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5. Cm1750 says on Apr 27, 2008 at 4:21 PM:
I have to agree with Dave. Looking at historical P/Es does not tell you what the company is worth - I focus more on intrinsic value. Calculating IV via DCF will force you to make assumptions regarding future margins, cash flows, growth etc. that may be very different than those in the past, which in turn determined historical P/Es.
Sell side analyst use historical P/Es as their primary tool, and we have all seen how good they are at investing.
Sell side analyst use historical P/Es as their primary tool, and we have all seen how good they are at investing.
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6. Stockdocx99 says on Apr 27, 2008 at 4:59 PM:
The median P/E by itself isn't enough to make something a buy.
I also use earnings yield and absolute P/E to see if any stock makes sense. I NEVER buy high P/E shares excepting perhaps cyclicals near the bottom of their cycles when EPS are marginal and multiples are thus not meaningful.
I was a pretty big player of WMT last fall myself by shorting puts for 2010 at strike prices of $45 and $50. Those are all now well out of the money and likely to expire. I also get tax deferment until April of 2011 if I leave them to expire in January 2010.
Combining historical valuations with present ones and using common sense on absolute pricing is how I do all my stock picking. You can review all the stocks I've written up here and you won't find any at high P/Es.
Billy T is on record as having sold out of WMT long ago to buy more JNJ and BNI anyway. He was not there for the recent surge.
Nothing you said contradicts my system at all. It works beautifully in any normal market environment. Last year's craziness was a once every 20 - 30 year environment where value got crunched no matter how cheaply you bought.
The Guru Scoreboard clearly indicated that anybody value oriented had poor results in 2007 - mid-March 2008. Things are getting dramatically better lately.
I also use earnings yield and absolute P/E to see if any stock makes sense. I NEVER buy high P/E shares excepting perhaps cyclicals near the bottom of their cycles when EPS are marginal and multiples are thus not meaningful.
I was a pretty big player of WMT last fall myself by shorting puts for 2010 at strike prices of $45 and $50. Those are all now well out of the money and likely to expire. I also get tax deferment until April of 2011 if I leave them to expire in January 2010.
Combining historical valuations with present ones and using common sense on absolute pricing is how I do all my stock picking. You can review all the stocks I've written up here and you won't find any at high P/Es.
Billy T is on record as having sold out of WMT long ago to buy more JNJ and BNI anyway. He was not there for the recent surge.
Nothing you said contradicts my system at all. It works beautifully in any normal market environment. Last year's craziness was a once every 20 - 30 year environment where value got crunched no matter how cheaply you bought.
The Guru Scoreboard clearly indicated that anybody value oriented had poor results in 2007 - mid-March 2008. Things are getting dramatically better lately.
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7. Blakeday says on Apr 28, 2008 at 1:54 PM:
I bought WMT and LEAPs when it was at 43. I just sold a few days ago at 57. It took longer than I expected to get to 57, but with a 30% gain, I'm not complaining.
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