Is Wal-Mart a Good Portfolio Play?

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 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.

Foreign supermarket giants faced being shut out of the Indian capital Tuesday after Delhi’s new state government said it would not grant them a licence to operate.  Amit Yadav, the Delhi municipality’s industry commissioner, told AFP he had written to the federal government to indicate that foreign “multi-brand retailers” would not be given consent to open stores in the capital in a reversal of previous policy. Foreign retailers which only sell their own branded products, such as Britain’s Marks and Spencer, have long been able to operate in India. But reforms unveiled by Prime Minister Manmohan Singh in late 2012 should pave the way for the first foreign supermarkets to operate, provided 30 percent of their produce is sourced locally. Delhi had been expected to be one of the first places to welcome the likes of Walmart and Tesco under the reforms.

T = Technicals on the Stock Chart Are Mixed

Wal-Mart stock has made positive progress in recent quarters. The stock is currently trading sideways and may need time to consolidate 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 between its rising key averages, which signal neutral 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

15.79%

66%

63%

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

February Options

Average

Average

March Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a significant amount of call and put option contracts and are leaning neutral 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 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

-1.19%

-2.62%

-2.15%

-5.44%

-3.85%

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 faced being shut out of the Indian capital Tuesday after Delhi’s new state government said it would not grant them a license to operate. The stock has made some progress in recent quarters, but is currently trading sideways. Over the last four quarters, earnings and revenues have been increasing. However, investors have had mixed feelings about Wal-Mart’s recent earnings announcements. Relative to its peers and sector, Wal-Mart has been a relative year-to-date performance leader. Look for Wal-Mart to continue to OUTPERFORM.

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