Is Wal-Mart A Worthwhile 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 worldwide. The company operates in three segments: Walmart U.S., Walmart International, and Sam’s Club. 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. Wal-Mart offers a wide variety of products at very competitively prices to demanding consumers at just about every part of the world. Consumers and businesses will continue to shop at Wal-Mart because of the convenience, affordability, and selection that its stores offers. As developing countries continue to grow, Wal-Mart is well-positioned to provide essential products and services to the people and businesses of these countries.

T = Technicals on the Stock Chart are Strong

Just last year, Wal-Mart stock broke above a multi-year price consolidation. The stock is exhibiting a strong uptrend and is now trading near all-time high prices. 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)

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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

19.2%

70%

68%

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

Flat

Average

June 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 very 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?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

11.14%

12.50%

8.26%

12.37%

Revenue Growth (Y-O-Y)

3.86%

3.36%

4.51%

8.47%

Earnings Reaction

1.51%

-3.63%

-3.08%

4.2%

Wal-Mart has seen increasing earnings and revenue figures over the last four quarters. From these figures, the markets have had mixed feelings about Wal-Mart’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Wal-Mart stock done relative to its peers, Costco (NASDAQ:COST), Target (NYSE:TGT), Dollar General (NYSE:DG), and sector?

Wal-Mart

Costco

Target

Dollar General

Sector

Year-to-Date Return

13.73%

9.30%

18.88%

17.67%

14.85%

Wal-Mart has been an average performer, year-to-date.

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Conclusion

Wal-Mart provides a wide range of products and services at competitive prices to consumers and businesses around the world. The stock has recently broken above a multi-year price consolidation and is now trading near all-time high prices. Earnings and revenue figures have been steadily growing but investors have expected more at times. Relative to its strong peers and sector, Wal-Mart is an average year-to-date performer. Look for Wal-Mart to OUTPERFORM.

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