Where Will Wal-Mart Go Next?

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 operates 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 very affordable prices to consumers and companies worldwide.

Wal-Mart is considering a takeover of one of Hong Kong’s supermarket chains owned by Asia’s wealthiest individual, Li Ka-shing, as part of a plan to expand its presence overseas. Wal-Mart has been in the midst of a strategy to open stores in China and employ 18,000 people.

T = Technicals on the Stock Chart are Strong

Wal-Mart stock has been trending higher over the last several years. The stock is now consolidating slightly below all-time highs so it may need to spend some time here. 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 slightly 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

16.42%

30%

28%

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

Put IV Skew

Call IV Skew

August Options

Flat

Average

September 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 small 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 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

4.59%

11.14%

12.50%

8.26%

Revenue Growth (Y-O-Y)

1.04%

3.86%

3.36%

4.51%

Earnings Reaction

-1.70%

1.51%

-3.63%

-3.08%

Wal-Mart has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have expected a little more from Wal-Mart’s recent earnings announcements.

P = Weak 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

13.53%

21.19%

20.85%

18.75%

17.83%

Wal-Mart has been a weak relative performer, year-to-date.

Conclusion

Wal-Mart is a global retail giant that provides a wide range of products to consumers and companies. The company is looking to strategically takeover a Chinese supermarket chain. The stock has been steadily rising and is now consolidating slightly below all-time high prices. Over the last four quarters, earnings and revenue figures have been rising, however, investors have expected more from the company. Relative to its peers and sector, Wal-Mart has been a weak year-to-date performer. WAIT AND SEE what Wal-Mart does after its next earnings announcement.

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