Will Recent News Hurt Wal-Mart’s Stock?

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.

In the first move of its kind, the city of Portland, Oregon, announced that a number of holdings the company held in retail giant Wal-Mart had expired, and that the city would not be making any further investments in the company. The decision by Portland city officials is unique in that it is the first time a major American city has turned on Wal-Mart, raising eyebrows around the country and wondering what other companies may get the cold shoulder from Stumptown. The divestment itself stems from the city’s 2013 adoption of a socially responsible investment protocol, the criteria of which Wal-Mart has apparently not met. Portland looks to be completely free of Wal-Mart investments by 2016, which all together adds up to $36 million, or 2.9 percent of the city’s portfolio. In response to the divestment, Portland Commissioner Steve Novick says Portland is blazing a new path in the way cities look at their investments.

“From what I can tell, no other U.S. city has looked at socially responsible investing in quite the same way as Portland,” he said. “I’m hopeful other cities and states take note and adopt similar investment principles to hold companies accountable and align our investment policies with our values. Unions and students from local universities were a driving force in implementing the new socially responsible investment protocols, which include the creation of a committee to oversee any future investments to address issues like health concerns and corruption. The protocols not only allow Wal-Mart’s current investments to expire, but also stops the city from pointing its investing activities back in Wal-Mart’s direction in the future, according to Truth-Out.

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 before heading higher. 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 signal neutral to bearish 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

12.97%

0%

0%

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

June Options

Steep

Average

July Options

Steep

Average

As of today, 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 small 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 had mixed feelings about 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

-3.96%

-11.80%

-3.34%

-7.21%

-5.57%

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 city of Portland, Oregon, announced that a number of holdings the company held in retail giant Wal-Mart had expired, and that the city would not be making any further investments in the company. 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 produced mixed feelings among investors. 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.

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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