Tag: WMT

Continuing some large-cap cursory scanning, I notice that Amazon is still at its very lofty valuation – I have no idea why they are trading so highly, but then again, that’s been the case for quite some time.

Whenever I look at Amazon I instinctively punch in Walmart. They have been in a trading range for most of last decade, but interestingly enough, they’ve appeared to have broken out of their trading range:

Back in the early 2000′s, Walmart was trading a very healthy P/E (around 20-25) and they had to settle into their valuation by actually earning enough in earnings to warrant the price. A few years ago they were around the 10-11 future-looking P/E range, while now they have crept up to 14 times future earnings. Is this because capital that was otherwise earmarked toward fixed income investments has moved into the equity side? Walmart equity is as close to a GDP-linked bond-like instrument as you could have gotten in the large cap market and I am wondering if others are seeing it this way?

Walmart is pretty much the economic barometer of the US retail economy and the other explanation is that maybe the US economy is recovering or stronger than the media makes it out to be?

I also notice that Target has exhibited a similar boost this year, albeit somewhat less pronounced than Walmart.

Just from my cursory examinations of the markets, it appears that large cap stocks are representing a better value than smaller capitalization issues. I am guessing the market is discounting some form of zero-growth projection in the future for a lot of these firms. One factor to remove from the analysis is government revenues – the theory would be that companies with higher exposure to government business will face pressure as deficits will force spending cutbacks.

Because of the currency differential, US stocks appear to be a better value at the moment – dividend-bearing companies can also be put in the RRSP to avoid withholding tax.

Just as the most basic example, Walmart (NYSE: WMT) is projected to earn about 8.5% of its capitalization this year – much better than sticking it in a 10-year government bond yielding 3.41%. You would think that the company would be able to scale its business appropriately if there was a recession – indeed, by looking at the stock chart you would be hard-pressed to see even a hint of an economic crisis in 2008-2009. You don’t even have to do any research – there is virtually no chance of Walmart not being able to produce profitable retail business in the medium-term future. This is contrasted with Amazon, which has to justify its valuation with huge amounts of growth over the next decade.

You will never see your investment in WMT rise by 30% in a year, but then again, you will not see it sink 30% either. It almost trades like a bond. It is a typical good “grandmother” stock.

There are many better (and smaller) examples of large cap companies that are trading at very attractive valuations, have a “moat”, and unlike Walmart, you could envision scenarios where they will warrant higher valuations.