Is Wal-Mart Poised to Head Higher?

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.

Last month, Wal-Mart Stores forecast annual profit that fell short of analyst estimates, evidencing the hit the company has taken from the struggling U.S. economy and government benefit cuts. Now, new CEO Doug McMillon is taking the company’s future into his own hands; he and 7,000 other associates met at Wal-Mart’s Year Beginning Meeting in March to discuss the retailer’s new plans. Bloomberg reported on the meeting last weekend and illuminated Wal-Mart’s new game plan to ensure that all stores are better stocked and employ a number of staff members who can sufficiently support in-store operations.

According to Bloomberg, “in-stocks,” or the measure of how much merchandise is available for shoppers to buy, is one area that Wal-Mart needs to focus on in 2014. Over the past year, its attention to keeping store shelves full has declined, and not only have executives noticed, shoppers have, too. The lack of merchandise has caused some loyal Wal-Mart customers to turn to the chain’s competitors, like Target (NYSE:TGT) and Amazon (NASDAQ:AMZN), at a time when Wal-Mart’s earnings are lower than they have been in many quarters.

T = Technicals on the Stock Chart Are Mixed

Wal-Mart stock has struggled to make significant progress over the last couple of years. The stock is currently trading sideways 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 between its rising key averages, which signals neutral 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

15.40%

76%

74%

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

Put IV Skew

Call IV Skew

May Options

Average

Average

June Options

Average

Average

As of Wednesday, there is average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral 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), and Kohl’s (NYSE:KSS) — and sector?

Wal-Mart

Target

Costco

Kohl’s

Sector

Year-to-Date Return

-2.24%

-3.86%

-6.54%

1.62%

-1.75%

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. Bloomberg reported that Wal-Mart’s new game plan to ensure that all stores are better stocked and employ a number of staff members who can sufficiently support in-store operations. The stock has struggled to make significant progress over the last couple of years and is currently trading sideways. Over the last four quarters, earnings and revenues have been increasing, which has left investors optimistic 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.

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