Wal-Mart Stock: Not Glamorous, But Super Efficient

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Source: Thinkstock

Source: Thinkstock

Retail stocks have had a fairly rough 2014. The SPDR S&P Retail ETF (NYSEARCA:XRT) is down nearly 8 percent for the year while the S&P 500 is up nearly 2 percent. This underperformance reflects lower profits and greater uncertainty in the retail space. But in particular we can see this weakness heavily concentrated in a few names. For instance Amazon (NASDAQ:AMZN) is down over 25 percent for the year. Whole Foods (NASDAQ:WFM) is down over 30 percent. Even a relatively safe retailer — Target (NYSE:TGT) — is down 8 percent.

Wal-Mart (NYSE:WMT) — the world’s largest retailer — is bucking the trend. So far this year shares are down just 1 percent. Furthermore, despite the fact that the company is a best of breed retailer, the stock trades at just 16 times earnings and it pays a 2.5 percent dividend which exceeds that of the S&P 500 (1.9 percent) and of the XRT (0.75 percent).

I expect Wal-Mart’s outperformance to continue, and I think that while retailers generally come with more risk than reward, Wal-Mart is one stock worth owning in the long run.

Wal-Mart is the world’s largest retailer. This means that it has inherent advantage versus its competitors insofar as it has the lowest inventory costs — virtually every producer of consumer goods in the world wants to sell their goods at Wal-Mart because of the exposure it gets them. This puts Wal-Mart in a position of power in the asymmetric relationship between retailer and consumer product producer in nearly every circumstance.

Furthermore, Wal-Mart has a bigger and better distribution infrastructure than any retailer, and this is why it is able to offer goods at such compelling prices relative to its competitors.

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