Will Recent News Hurt Wal-Mart 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, 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 Stores said on Friday that bad weather and reduced food stamp benefits in the United States had dragged down comparable-store sales in the fiscal fourth-quarter, more than offsetting a positive bump from the holiday season. The news came the same day the world’s largest retailer shaved its quarterly outlook to account for special items, including those tied to its store closures in Brazil and China and its Sam’s Club restructuring in the United States. It now expects earnings for the fourth-quarter ending January 31 to be at or slightly below the low end of its previous forecast of $1.60 to $1.70 a share. ”Wal-Mart caters to lower-income consumers which have been hit disproportionately hard relative to higher-income consumers,” said Morningstar analyst Ken Perkins.

T = Technicals on the Stock Chart Are Mixed

Wal-Mart stock has been trending higher over the last couple of years. The stock is currently trading sideways and may need time to stabilize. 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

17.89%

96%

94%

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

February Options

Steep

Average

March 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 very significant 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 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

-4.56%

-10.70%

-5.01%

-10.60%

-6.71%

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 now expects earnings for the fourth-quarter to be at or slightly below the low end of its previous forecast of $1.60 to $1.70 a share. 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.

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.

More From Wall St. Cheat Sheet: