Is Wal-Mart an Attractive Investment?

With shares of Wal-Mart (NYSE:WMT) trading around $77, is WMT an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Wal-Mart operates retail stores in various formats around the world. The company aims to price items at the lowest price every day. Wal-Mart operates in three business segments: the Walmart U.S. segment, the Walmart international segment, and the Sam’s Club segment. It manages retail stores, restaurants, discount stores, supermarkets, supercenters, hypermarkets, warehouse clubs, apparel stores, Sam’s Clubs, neighborhood markets, and other small formats, as well as Walmart.com and SamsClub.com. Through its retail channels, Wal-Mart is able to provide a variety of products and services at affordable prices to consumers and companies worldwide.

The research & development and innovation end of Wal-Mart, @WalmartLabs, has acquired the ecommerce startup Adchemy. The company announced the acquisition in a post published on Monday. The report details the technology branch’s growth. In the past year, it had hired about 1,000 people. Senior Vice President and Chief Technology Officer Jeremy King authored the post. He praised Adchemy for its work before the acquisition. “Adchemy is a product search company and a leader in e-commerce technology. The company was founded in 2004 in Foster City, California, and over the years has built an impressive team that will help Walmart transform the shopping experience for millions of shoppers each week. This latest acquisition continues our quest to build best-in-class e-commerce capabilities in-house,” wrote King in the post. King specifically mentioned three employees who would join the @WalmartLabs team; Adchemy’s Vice President of Engineering Rohit Deep, Vice President of Products Ethan Batraski, and Head of Research Esteban Arcaute. Deep is formerly of WebEx. Batraski and Arcaute previously worked at Yahoo (NASDAQ:YHOO).

T = Technicals on the Stock Chart Are Mixed

Wal-Mart stock has seen its fair share of volatility over the last couple of years. The stock is currently pulling back and may need time to stabilize. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Wal-Mart is trading above its rising key averages which signal neutral to bullish price action in the near-term.

WMT

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Wal-Mart options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Wal-Mart options

17.30%

60%

58%

What does this mean? This means that investors or traders are buying a significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

June Options

Flat

Average

July Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Wal-Mart’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Wal-Mart look like and more importantly, how did the markets like these numbers?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

-18.56%

5.56%

5.93%

4.59%

Revenue Growth (Y-O-Y)

1.51%

1.66%

1.68%

1.04%

Earnings Reaction

-1.77%

0.22%

-2.6%

-1.7%

Wal-Mart has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Wal-Mart’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Wal-Mart stock done relative to its peers, Target (NYSE:TGT), Costco (NASDAQ:COST), Kohl’s (NYSE:KSS), and sector?

Wal-Mart

Target

Costco

Kohl’s

Sector

Year-to-Date Return

-0.79%

-8.34%

-5.62%

-6.10%

-4.21%

Wal-Mart has been a relative performance leader, year-to-date.

Conclusion

Wal-Mart is a retail company that provides a variety of products and services to consumers and companies worldwide. The research & development and innovation end of Wal-Mart, @WalmartLabs, has acquired the ecommerce startup Adchemy. The stock has seen its fair share of volatility and is currently pulling back. Over the last four quarters, earnings and revenues have been increasing, which has left investors pleased about recent earnings announcements. Relative to its peers and sector, Wal-Mart has been a relative year-to-date performance leader. Look for Wal-Mart to OUTPERFORM.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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