Wal-Mart Stock: Always Low Prices

Crista Huff
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Posted: Dec 09, 2011 12:01 AM

Stock price probably isn't one of the things Wal-Mart likes to slash prices on.  But if you've been a Wal-Mart investor for the past ten years, you are certainly used to it.  

Wal-Mart Stores Inc. (WMT, $58.44) is made up of Walmart U.S. (about 62% of the Wal-Mart pie), Walmart International (26%) and Sam's Clubs (12%).

Citi Investment Research and Analysis reported in their bi-weekly Food Pricing Survey on December 6, 2011, "WMT continued to turn up the heat on its competitors, as it tries to increase its share of the food retail pie.  Additionally, WMT has committed to investing $2B [billion] in price starting in 2012 and spanning the next two years.  The company plans to fund the price investments through productivity improvements and SG&A [selling, general and administrative expense] reductions.  We believe WMT's price reductions in our most recent survey show the company's firepower, and we expect these investments to continue ahead."

Wal-Mart has projected consensus earnings (EPS) growth of 10%, 9% and 11% for fiscal years 2012 through 2014.  Those are good numbers for the largest Fortune 500 company in America, as measured by annual revenue.

Standard & Poors has a 5-Stars, Strong Buy rating on Wal-Mart stock as of Dec. 3, 2011, which sounds deceivingly bullish for a company whose institutional ownership is only 30%.  There's a reason that Wall Street has been avoiding this stock.  It's not the PE (13), the dividend (2.50%), the projected earnings growth, the share repurchase program, the credit rating (AA), the long-term debt ratio (34%), the consistent year-over-year growth of both sales and EPS, or the beta (0.34).  I think it's the chart.

Wal-Mart stock has spent the last ten years trading repeatedly between $42 and $62.  Wow.  

That's not very encouraging.  

Based on chart patterns, I'm thinking that Wal-Mart, which is on an uptrend, may trade in the $55 - $60 range in the near-term.  But there are an awful lot of people who bought this stock around $60, have held it 3-9 years, and are sick of not making money.  Each time the stock approaches $60, more of them sell at close to break even and say, "Good riddance!"

Here's what I would do with Wal-Mart stock.  If I owned it in a retirement account, I'd sell it at $60 and buy a growth & income stock with a better chart.  If I owned it in a taxable account, I'd make sure I knew exactly what would happen at tax time before selling and buying a better stock.  (Lots of intelligent people have no clue how to deal with capital gains taxes and cost basis.  Make sure you know in advance how this gets reported on your tax return.)

If I were a growth stock investor who was fixated on owning Wal-Mart stock, I'd put in a buy order at $48.  That way, when it went up to $60 and fell back down several more times, at least I'd have profit and wouldn't obsess over it.  If I were a trader, I'd buy Wal-Mart at $48, sell it at $60, and be ready to buy it at $48 again if the opportunity arose.

We buy stocks to grow our capital, and secondarily to earn income.  If our capital is not growing, and the dividends are in the 0-4% range, we're in the wrong stocks.  Do you own Wal-Mart stock?  Do you have a plan on what to do with it if it continues to trade in the $42 - $62 range for ten more years?  I'm not being dramatic: formulate a plan so as to improve your investment strategy over time.  If your strategy doesn't improve, neither will your investment returns.

Readers should consult their investment and tax advisors to determine suitability, risk and taxation.