WMT Stock: Is This Why Warren Buffett is Dumping Wal-Mart?

Warren Buffett Is Dumping WMT StockWarren Buffett Is Dumping WMT Stock

If you think you should buy the same stocks as Warren Buffett, does the same hold true for when he sells a significant stake in a company? Warren Buffett reported his 13F filing for the third quarter on November 16 and if you take the man at his word, his purchase of Precision Castparts Corp. (NYSE:PCP) during the third quarter influenced his trading decisions. That included shedding his stake in Wal-Mart Stores, Inc. (NYSE:WMT) by seven percent. But I’m not so sure I’m buying what Buffett is selling when it comes to WMT.

Berkshire Hathaway’s Stock Holdings Change Significantly

The core of Buffett’s holdings didn’t change all that much. Over half of the total equity holdings are concentrated in just a few companies. In fact, the top four holdings comprise 58.79% of his portfolio. (Source: “Form 13F,” Securities and Exchange Commission, November 16, 2015.)

Credit card giant American Express at $11.2 billion, IT-services company International Business Machines Corporation (NYSE:IBM) at $11.7 billion, beverage behemoth The Coca-Cola Company at $16.0 billion, and banking giant Wells Fargo & Company at $25.2 billion.

During the third quarter, Buffett added AT&T Inc. as a new holding in the Berkshire Hathaway Inc. portfolio, buying 59.3 million shares for $1.9 billion. He also increased his holding in General Motors Company by nine million shares in the third quarter and purchased 27.3 million shares of Phillips 66.

But his divestitures are raising the most eyebrows. During the third quarter, Buffett owned just fewer than 11 million shares of The Goldman Sachs Group, Inc., down from 12.6 million at the end of the second quarter. His stake in Walmart in the third quarter included 56.2 million shares, down from 60.4 million on June 30.

Profits from the sale of Walmart stock and Goldman Sachs were used to fund his purchase of Precision Castparts. Buffett said the sale of both stocks during the third quarter was not a reflection of either stock’s value.

Wal-Mart Has Been a Dog in 2015

Again, I’m not so sure I’m buying what Warren Buffett is selling. I’m sure his sale of Walmart stock was an effort to free up cash. It’s not as if he’s totally soured on Walmart; Berkshire Hathaway still owns $3.0 billion worth of the company’s stock. But out of all his holdings, why Walmart?

Maybe because Buffett can see the short-term writing on the walls and would rather pick up additional Walmart shares a few quarters down the road, when it’s an even bigger steal?

Trading near $60.50, the company’s stock is down almost 30% so far this year and is trading at its lowest levels since April 2012. Its share price is down that much for a very good reason; the numbers are bad and the outlook is, too. (Source: “Walmart Reports Third Quarter Earnings,” Wal-Mart Stores, Inc., November 17, 2015.)

walmart stores nyse stock chart

Chart courtesy of www.StockCharts.com

The company reported a slim 3.5% increase in sales at its U.S. stores and adjusted earnings per share (EPS) came in at $1.03, within guidance. However, a closer look at the numbers shows you all is not well at Walmart.

Third-quarter revenue was down 1.3% year-over-year, hitting $117.4 billion; income from continuing operations was down 11.0% at $3.3 billion; and diluted EPS were down 10.4% year-over-year at $1.03, making it the third consecutive quarter of declining profits. To make matters worse, the company said things wouldn’t be looking any better for at least a few years.

In response, shares in Walmart fell 10%, the biggest one-day drop for the company’s stock in 27 years. This was following the company’s announcement that wage increases and e-commerce would eat a big portion of its profits for the next three years and it wouldn’t post increases in EPS until fiscal 2019. For 2015, the company expects to report “flat total sales growth.”

Buffett could see the writing on the wall and ditched a sizeable portion of the world’s biggest retailer, knowing he could pick it back up at a later date and at a much better deal.

U.S. Retail Data Abysmal

Buffett could read the writing on the wall, because it’s been there for anyone who has been paying attention to the economic data. Unemployment may be down at five percent, but the underemployment rate is still at 10%. The quality of jobs isn’t spectacular and wage growth really hasn’t materialized on any meaningful level. These aren’t the best metrics for any economy that gets 70%+ of its gross domestic product (GDP) from consumer spending.

Plus, corporate America is feeling it and has been for ages. In October, U.S. retail sales increased 0.1%, far lower than the expected (though still underwhelming) 0.3%. A decline in automobile sales also pointed to a slowdown in consumer spending that could put a wet blanket on expectations for a pick up in the fourth quarter.

That doesn’t bode well for the first quarter of 2016, either. Over the last few years, weak first-quarter retail figures have been blamed on the cold weather. Economists will, no doubt, use the same excuse in 2016.

The Bottom Line on WMT Stock

Any way you look at it, the U.S. retail environment looks bad. In light of the poor jobs market, retail sales will continue to deteriorate or be uneven at best. Keep in mind that 45 million Americans use some form of food stamps, after all. Before the financial crisis and so-called economic “recovery,” this number sat at just 26 million. (Source: “Supplemental Nutrition Assistance Program Participation and Costs,” U.S. Department of Agriculture, last accessed November 19, 2015.

Again, these aren’t the best metrics for a country looking to its citizens to keep it economically viable. Maybe this is just one of many reasons why Warren Buffett shed 4.2 million shares of Walmart stock.

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