GuruFocus Premium Membership

Serving Intelligent Investors since 2004. Only 96 cents a day.

Free Trial

Free 7-day Trial
All Articles and Columns »

Walmart Stores -- The One Blue-Chip Stock Every Investor Should Own

September 29, 2010 | About:

Street Authority

17 followers
Legend has it that the term "blue chip" stems from poker, in that it represented the poker chip with the highest value in the game. These days, the term is ubiquitous in the stock market and refers to a large, stable company that is financially sound, has well-known brand and market awareness and a diversified sales base.

Blue chips are also frequently known as industry bellwethers. A perusal of the 30 companies that make up the Dow Jones Industrial Average is perhaps the best illustration of blue chips across a wide array of industries. Prime examples include Coca Cola (KO), American Express (AXP) and Intel (INTC), as they dominate their respective industries and their corporate logo qualifies as a global brand with billions of dollars in brand equity.

Interestingly, these companies have been laggards in terms of overall stock market returns. This is in stark contrast to historical periods when they have been the most sought after firms for investors. The Nifty 50 stocks in the 1960s and 1970s represented a time when investing in the largest firms in the market was seen as a no-brainer -- these stocks could be held forever because it was difficult to see them lose competitiveness to smaller, lesser capitalized rivals.

The late 1990s represented another period where investors held blue chips in high regard and bid valuations to more than 50 times earnings in many cases. These days though, blue chips are trading at low double-digit multiples of their earnings, as it has taken a decade for sales and profit growth to catch up to the lofty valuations placed on these firms during what is now considered the dot-com bubble.

At some point, perhaps in the very near future, investors will again reward quality companies with higher valuations. In addition, these firms are large and globally diversified, which means they should be able to withstand downturns in the business cycle and expand in faster-growing emerging markets. As such, blue-chip investing has great appeal right now.

Downside protection is another strength these firms offer investors. A large number of investors remain worried about global economic growth, given that we just went through one of the worst financial crises since the GreatDepression. For the most part, blue chips, barring a select class of unfortunate financial titans, have survived the global meltdown with flying colors.

Given the valid concerns regarding a double-dip or prolonged recession in the global economy, Wal-Mart (WMT) is the blue chip that every investor should own. It has survived two major recessions in the past decade, demonstrating it is capable of withstanding "tail risk" (a supposedly improbable market meltdown that is occurring with regularity in the market) and was one of only a few firms that actually benefitted during a recession.

The stock hasn't done much during the past decade. This is because the price-to-earnings (P/E) ratio was at 47 back in 2000. Sales and earnings have grown about +10% annually during this time frame though, and though double-digit sales growth will be challenging in the next decade, management has the discipline and wherewithal to leverage high single digit top-line growth into +10% or higher profit growth well into the future. And Sales upside does still exist as Wal-Mart expands globally. As a case in point, it has seen success in cost-conscious markets such as Mexico and just announced ambitious expansion plans into Africa.

Action to Take ---> At a current P/E of about 14, this means that shareholders can expect investment returns along these levels. Throw in potential earnings multiple expansion (though 47 seems like a huge stretch) and a 2.3% current dividend yield, and it's hard to see a safer investment out there that also offers a high likelihood of solid returns for many years to come.

ryan-fuhrmann-signature.jpg

-- Ryan Fuhrmann

A graduate of the University of Wisconsin and the University of Texas, Ryan Fuhrmann, CFA, adheres to a value-based investing viewpoint that successful companies... Read more...

Disclosure: Neither Ryan Fuhrmann nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority

Rating: 2.8/5 (12 votes)

Comments

madmilker
Madmilker - 3 years ago
You are joking....right. on Wal*Mart's China web page! "Walmart entered the Chinese market and opened its first Supercenter and Sam’s Club in Shenzhen in 1996. Currently, Walmart operates a number of store formats in China including Supercenters, Sam’s Clubs, and Neighborhood Markets. As of June 27, 2010, Walmart had 187 units in 99 cities, and created over 50,000 job opportunities across China. Walmart China firmly believes in local sourcing. We have established partnerships with nearly 20,000 suppliers in China. Over 95% of the merchandise in our stores in China is sourced locally. Meanwhile, Walmart is committed to local talent development and diversity, especially the cultivation and full utilization of female staff and executives. 99.9% of Walmart China associates are Chinese nationals. All our stores in China are managed by Chinese local talent. 43% of leaders at senior manager level and above are female. In 2009, the company established the “Walmart China Women’s Leadership Development Commission” for driving women’s career development." 5% foreign in their stores in China does not support any country but China. Remember what Lance Winslow wrote in that article "The Flow of Trade in a Global Economy"....dang! better yet...just take the time and read this ...."Now let us look at Wal-Mart again; you buy a product there, 6% goes to the employees, 10-18% is profit to the company, 25% goes to other costs and 50% goes to re-stock or the cost of goods sold. Of the 50% about 20-25% goes to China, a guess, but you get the point. Now then, how long will it take at 433 Billion dollars at year for China to have all of our money, leaving no money flow for us to circulate? At a 17 Trillion dollar economy less than 40-years minus the 1/6 they buy from us. Some say that if we keep putting money into our economy, it would take forever, but if we do not then eventually all the money flow will go. If China buys our debt then eventually they own us, no need to worry about a war, they are buying America, due in part to our own mismanaged trade, so whose fault is that? Not necessarily China, as they are doing what's in the best interests, and we should make sure that trade is not only free, but fair too." Also, think for a moment about George Washington....yes the man that is on the US dollar bill.... "Washington had been reelected unanimously in 1792. His decision not to seek a third term established a tradition that is now embedded in the 22d Amendment of the Constitution." Take the time to read his farewell address after only eight years of serving his country and than ask yourself this....How do you think George feels being sent overseas in return for all that foreign so-call cheap items and being left in a foreign bank because the American worker doesn't make anything for the foreigners to buy. Cheap items didn't make this great union of 57...oops! 50 states the greatest place on the face of this Earth.....the American worker (union and non-union) did. You can't have a strong country without having a strong currency and you can't have a strong currency unless you keep it floating around within your 50 states. This is why the store with the star in the name puts 95% China made items in their stores in China....to keep their "yuan" in their country helping the nice people there. And with only 5% left for all the other 182 country's that make stuff including the United States of America....that doesn't produce very many jobs outside of China. Being an old person myself and knowing how it was back in the 40's, 50's and 60's in this union of 50 states....I look at George each time I pull him out of my billfold and make a promise to send him out for items made in America so after floating around helping each hand he touches just maybe one day he will shake mine again. Retail makes NOTHING... Governments only make MORE DEBT... It's time for less of those two and for America to get back to what it does best....MAKE STUFF.. cause George Washington on that dollar can't help anyone in the United States of America if he is being held in a foreign hand. Made In America is the only way out of this mess cause foreign made put US here.

Please leave your comment:


Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)
Free 7-day Trial
FEEDBACK
Email Hide