Wal-Mart (WMT, Financial) has corrected by 9.1% so far this year, and the correction has been backed by weak retail sales data for the month of January and February. However, I believe that retail sales decline is temporary and investors should use this opportunity to consider some exposure to Wal-Mart at current levels. This article discusses the reasons to be bullish on Wal-Mart in the near-term.
I mentioned weak retail sales for January and February. However, advance estimates of retail sales for March 2015 is encouraging and this is the first reason to be bullish on Wal-Mart for the near-term.
According to US Census Bureau release, retail sales have increased for March 2015 (excluding and including autos). While these are advance estimates, I expect the actual retail sales to be in line with these estimates when it’s released on April 30. This will provide a positive trigger for Wal-Mart and also for US equity markets.
The second important reason to be bullish on Wal-Mart is the point that consumer confidence remains at an elevated level and the job market continues to improve, even as the improvement in the jobs markets has moderated in the recent past. As long as consumer sentiment remains strong, it makes sense to remain invested in retail stocks for a consumption driven economy.
I must add here that Wal-Mart recently announced a wage increase for low-wage workers well above the federal minimum wage. While this is likely to have an impact on the company’s margin, the factor is already discounted in the stock and I don’t expect another downside when 1Q15 results are released on May 19 and the margins are relatively depressed.
It is also important to mention that US Census Bureau will release the advance retail sales estimates for April 2015 on May 13. While I am recommending exposure to Wal-Mart at current levels, investors need to watch for that data as well. A sustained recovery in retail sales would imply that investors can continue to hold the stock beyond 1Q15 results. However, weak retail sales for April 2015 can again be a sell signal.
Therefore, current levels are attractive for exposure to Wal-Mart, but investors need to keep a close eye on retail sales data for further conviction on holding the stock.
Among the positive factors, Wal-Mart has a beta of 0.3 and I believe that it’s a good time to hold low beta stocks as equity markets are likely to be wobbly on rate hike expectations. Wal-Mart also provides a healthy dividend yield of 2.4% considering the current payout of $1.96 per share.
In conclusion, Wal-Mart can be considered at current levels for some near-term gains as well as for some exposure to a relatively defensive stock. In my view, the stock can deliver 5% to 10% near-term gains. Depending on the retail sales data in the coming months, investors can decide on the holding period for the stock.
