Will Recent News Help or Hurt Wal-Mart?

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With shares of Wal-Mart (NYSE:WMT) trading around $74, is Wal-Mart 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 operates retail stores, restaurants, discount stores, supermarkets, supercenters, 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 very affordable prices to consumers and companies worldwide.

Just recently, Wal-Mart is considering a takeover of one of Hong Kong’s supermarket chains owned by Asia’s wealthiest individual, Li Ka-shing, as part of a plan to expand its presence overseas. Wal-Mart has been in the midst of a strategy to open stores in China and employ 18,000 people. Also, Wal-Mart Stores posted earnings that met Wall Street’s expectations but came up short on beating the revenue expectation.

T = Technicals on the Stock Chart are Mixed

Wal-Mart stock has been trending higher in recent years. However, the stock is currently trading sideways as it consolidates gains from a recent bullish run. 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 between its key averages which signal neutral to bullish 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

15.04%

3%

0%

What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

September Options

Flat

Average

October Options

Flat

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 small 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 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

5.93%

4.59%

11.14%

12.50%

Revenue Growth (Y-O-Y)

1.68%

1.04%

3.86%

3.36%

Earnings Reaction

-2.60%

-1.70%

1.51%

-3.63%

Wal-Mart has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been not been pleased with Wal-Mart’s recent earnings announcements.

P = Weak 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

8.63%

16.31%

13.69%

22.41%

14.57%

Wal-Mart has been a poor relative performer, year-to-date.

Conclusion

Wal-Mart is a retail company that provides a a multitude of products to consumers and companies worldwide. In recent news, the company is looking to expand in China and also reported earnings that did not meet investor expectations. The stock has been trending higher but is now consolidating as it takes a some time to catch its breath. Over the last four quarters, earnings and revenue figures have been increasing, however, investors in the company have not been pleased. Relative to its peers and sector, Wal-Mart has been a poor year-to-date performer. WAIT AND SEE what Wal-Mart does this coming quarter.

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