Is Wal-Mart Well-Positioned for the Future?

With shares of Wal-Mart (NYSE:WMT) trading around $75, 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.

Wal-Mart Stores has opened an e-commerce website to supply goods to mom-and-pop merchants in India as the world’s largest retailer seeks to dominate a market it estimates will be valued at $50 billion by 2020. Wal-Mart is counting on its online operations to help fuel sales as it grapples with a slowdown both at home and abroad. The Indian website is only for existing users of its members-only cash-and-carry stores and may help draw orders from small businesses more than 20 kilometers (12 miles) from outlets and that aren’t serviced by sales representatives, said the company’s chief executive for India, Krish Iyer.

T = Technicals on the Stock Chart Are Weak

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 consolidate. 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 below its rising key averages, which signals neutral to bearish price action in the near-term.

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

13.7%

53%

50%

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

July Options

Steep

Average

August Options

Steep

Average

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

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

-2.63%

-18.56%

5.56%

5.93%

Revenue Growth (Y-O-Y)

0.78%

1.51%

1.66%

1.68%

Earnings Reaction

-2.42%

-1.77%

0.22%

-2.6%

Wal-Mart has seen mixed earnings and increasing 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

-4.41%

-8.71%

-3.40%

-7.01%

-4.88%

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 company has opened an e-commerce website to supply goods to mom-and-pop merchants in India. The stock has seen its fair share of volatility and is currently pulling back. Over the last four quarters, earnings have been mixed while revenues have been increasing, which has left investors pleased. Relative to its peers and sector, Wal-Mart has been a relative year-to-date performance leader. WAIT AND SEE what Wal-Mart does this quarter.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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