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Recently Wal-Mart reported disappointing sales and the stock dropped down to the high $42's now settling in the upper $43 level. Is this former high flier which was over $70 before the bubble burst ready to rebound? Billytickets will try and help you make your decision.
At first glance many are predicting Wal-Mart's demise and with the recession word out there many believe that the retail sector which Billytickets has been loathe to invest in is for hard times ahead. If you look at valueline which jumps out at you is that valueline is still predicting 10% annual growth for WMT. If you read the 3 to 5 year forecast at the current price ratio it is 12-16% annual price appreciation and adding in the over 2% dividend yield (that was just raised 31%)
The stock has recently been under pressure since the death of Helen Walton who owns a very large chunk of stock that will more than likely be part of a charitable organization. Warren Buffett who knows a few things about stocks has a cost basis which is considerably higher than the current price. The huge 15 billion dollar buyback is proof that management has confidence in its core business. There was a rumor last week that a Chinese fund is interested in purchasing an 8 billion dollars worth of WMT stock in the open market
Is the information listed in the 2 paragraphs above the main reason Billytickets is buying the stock and recommends its purchase at these levels? Partly. The main reason is that Wal-Mart stock which has been overpriced for the last 7 years has finally become a safe haven for investors because of its low price WITH OR WITHOUT a rate cut. Buffett and others gurus which can be researched on the great website gurufocus BOUGHT in at prices higher than you are paying NOW. This company armed with their stock buyback will be able to continue raising their earnings per share by 8-11% percent annually MINUMUM. If we get a rate cut as many (not me) expect then obviously consumer spending will be increased but what if a US recession comes? The overall pie may "shrink" but Wal-Mart's share of it will increase as the low cost provider. Kelly criterion investors will love this stock because the chance of it earning" LESS than it did last year with the massive stock buyback is virtually zero. Examine its earnings during the last 3 "bad years" and you will see double digit annual EPS growth. If the EPS is 20% less than expected (8% annual increase instead of the 10% forecasted at valueline) you will have a EPS of 3.97 per share in 2011. In 2012 5 years from now with trailing EPS of 16 the stock will be 63.52. At 44 dollars per share your return will be 44.36% plus the over 2% annual dividend which over the past 5 years has increased 20% annually.
Also the downside on this stock is quite low because the Chinese fund and the many gurus as mentioned above and their "entry points" can be read on gurufocus and if by chance the stock was to fall much further would be "increasing" their positions providing WMT with a "floor". I know billytickets posts are sometimes crude and usually about "boring" big cap stocks with limited upside. But remember Warren Buffett's 2 top rules. One: Don’t LOSE MONEY and Two: DONT FORGET RULE 1.
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BillyTickets, though, isn't someone who's buying dozens of stocks -- he advocates super-concentrated portfolios comprised of about five stocks. Is Wal-Mart really one of the five best stocks to own right now? I'm not convinced by the essay above, which says nothing about the difference between Wal-Mart's situation today (having essentially saturated the American market for big-box stores and having challenges growing internationally) with its situation during previous years. I'm not sure that simply extrapolating past trends is as helpful here. Much of Wal-Mart's future growth will depend on its success (or lack thereof) with new, untested types of smaller stores.
Also, I wouldn't use predictions of additional buying by guru owners as a reason why you feel there is little downside -- who knows what the gurus will do? They have been known to sell stocks they own as well as buy more of them.
Two other points, while I am continuing my devil's advocacy:
1) Wal-Mart's high debt ($43 billion versus $6 billion in cash) should be taken into account when considering its valuation, earnings expectations, and potential for future buybacks.
2) Wal-Mart's stock price has declined recently despite negligible short interest -- less than 1% of the stock is currently sold short. If short sellers had driven the stock down, at least we'd know they'd have to buy the stock at some point to cover their short positions. By contrast, whoever has been dumping Wal-Mart recently won't have to buy it back.