Can Wal-Mart Break Higher?

With shares of Wal-Mart (NYSE:WMT) trading around $80, 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, super centers, 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 executives are feeling the heat from an investigation by the U.S. Department of Justice over possible violations of the Foreign Corrupt Policies Act. Reuters reports that Wal-Mart is paying for lawyers for as many as 30 executives targeted by the DoJ over suspicion of bribery and other misconduct in Mexico, Brazil, China, and India.

T = Technicals on the Stock Chart Are Strong

Wal-Mart stock has made positive progress in recent quarters. The stock is currently surging higher as it trades near highs for the year. 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)

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

15.06%

56%

54%

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

Put IV Skew

Call IV Skew

December Options

Flat

Average

January 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 minimal 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 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

5.56%

5.93%

4.59%

11.14%

Revenue Growth (Y-O-Y)

1.66%

1.68%

1.04%

3.86%

Earnings Reaction

0.22%

-2.60%

-1.70%

1.51%

Wal-Mart has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have had conflicting 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, Target (NYSE:TGT), Costco (NASDAQ:COST), Kohl’s (NYSE:KSS), and sector?

Wal-Mart

Target

Costco

Kohl’s

Sector

Year-to-Date Return

17.43%

7.03%

23.09%

27.45%

19.75%

Wal-Mart has been an average relative performer, 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’s executives are feeling the heat from an investigation by the U.S. Department of Justice over possible violations of the Foreign Corrupt Policies Act. The stock has made some progress in recent quarters and is currently surging higher. Over the last four quarters, earnings and revenues have been increasing. However, investors have had conflicting feelings about Wal-Mart’s recent earnings announcements. Relative to its peers and sector, Wal-Mart has been an average year-to-date performer. Look for Wal-Mart to continue to OUTPERFORM.

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