Here’s How Wal-Mart Stock Could Unlock Value for Investors
The world’s largest retailer and employer, Wal-Mart Stores, Inc. (NYSE:WMT) reported its third-quarter earnings today and managed to beat the Street’s earnings forecasts, but missed on revenue. Earlier last month, WMT stock saw the worst of its falls in 15 years, when company management revised its guidance downward for the next two years. WMT stock has now soared on positive guidance, but investors are nervous about whether or not this rally will continue. Here’s how you could play the market.
Wal-Mart reported some great figures for the third quarter. Same-store sales went up by 1.5%, traffic was up 1.7%, and international sales were up 3.2%, excluding currency translation. Despite the revenue miss, the revenue number is a solid figure. Also, the topline is not bad when you compare it to those of its peers. The problem is certainly with the bottom line, which, although guided higher, will continue to get hit by higher wage-related expenses going forward.
The other most commonly cited investor concern on Wal-Mart stock is the threat to its brick-and-mortar model from online retailer Amazon.com, Inc. (NASDAQ:AMZN). The e-commerce giant has announced plans to start drone deliveries to customers as early as 2019. I believe the concern is exaggerated. Firstly, the drone delivery project, “Prime Air,” faces a lot of technical hurdles and it will take Amazon years before it can hop these hurdles and match Wal-Mart’s sales volume. Secondly, Amazon is finding value in the brick-and-mortar model, as it recently opened its first-ever physical bookstore in Seattle. Could Amazon eventually change its business model? I won’t bet against it.
On the contrary, Wal-Mart is also investing heavily in digital technology by cutting down its capital expenditures and stepping up its technology expenditures. Wal-Mart was able to derive a good 10% year-over-year increase in e-commerce sales from its current model in the latest quarter alone.
Let’s just say now that the only prominent headwind that remains for the company is the minimum wage issue. The Republicans are relatively mum on the issue, while the Democratic candidates are very vocal on the need for a minimum wage hike. It remains to be seen who takes the oval office next year, but the problem remains real for the retail giant.
Limiting Downside with a Protective Put on Walmart Stock
Compared to its peers, like Whole Foods Market, Inc. (NYSE:WFM) and The Kroger Co. (NYSE:KR), Wal-Mart offers a higher dividend yield, lower beta risk, and cheaper multiples. Long-term investors may have little to worry about since WMT stock seemingly has attractive fundamentals and offers a promising upside.
However, shortsighted investors often find sudden price slumps to be very daunting. For them, a great option trade is to enter into a protective put. Essentially, this is the antithesis of a covered call strategy, so if you’ve traded covered calls, this should be easy for you to understand. The idea is to buy WMT stock plus a put option on it, that is, an option to sell it at the predetermined exercise price should the price fall below the exercise price. If the price of WMT stock goes up, you are set to make unlimited profits, depending on where the price stands at the time of expiration of your protective put position. On the contrary, if the price falls, you lose the option premium, but your downside is limited to the exercise price of the stock.
The Bottom Line on Wal-Mart Stock
WMT stock has now entered the oversold territory, after having witnessed a 32% year-to-date demise in value.
Often referred to as a dividend aristocrat and cited as Buffett’s eye-candy stock, this retail giant has been a great investment for long-term value-seekers. Unlike management’s guidance for last month, the latest earnings report makes me optimistic about Walmart’s future.
Rest assured, WMT stock will rise again to reclaim its glory.