Why Wal-Mart Is Still a Compelling Investment

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Generally, I don’t like investing in retail stocks. Retail is incredibly competitive — unless you live in the middle of nowhere, it seems that you can’t go a fraction of a mile without coming across some retailer. As consumers, we have a plethora of choices as to where to shop. Furthermore, we’re pretty fickle: With very few exceptions, we don’t put very much thought into choosing one store or another, and decisions are often based on something as simple as convenience, a rudimentary knowledge of pricing, or the fact that a certain store pops up on an Internet search engine. Furthermore, if a company slips up even slightly, it could mean the loss of a large portion of its sales [e.g., J.C. Penney (NYSE:JCP)].

Therefore I tend to avoid retailers, and generally I believe that it is probably easier to find losers in this sector as potential short opportunities than winners as long opportunities. Whenever we do have clear winners, there are often issues of valuation. Consider the rich valuations of Michael Kors (NYSE:KORS), which trades at more than 30 times earnings, Whole Foods (NASDAQ:WFM), which trades at 35 times earnings, or Chipotle Mexican Grill (NYSE:CMG), which trades at over 50 times earnings. As a value investor I have a very difficult time paying these sorts of multiples for any company without an extraordinary reason.

However, one major exception to my anti-retail sentiment is Wal-Mart Stores (NYSE:WMT). As Wal-Mart’s recent earnings figures have been relatively weak, I think a lot of investors have lost confidence in this company’s ability to generate shareholder value. Nevertheless, Wal-Mart is arguably better positioned than any retailer with the possible exception of Amazon (NASDAQ:AMZN). As the world’s largest retailer, the company has an inherent advantage insofar as it can get the best prices on items to sell, and virtually every producer of consumer goods wants to sell their goods at Wal-Mart.

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