Walmart Inc (WMT)

Since the beginning of February, a lot of the most under performing stocks in the market have bounced, and a lot of the strongest stocks have had a little pullback. There are a lot of people who feel the PE multiple of the market is expensive, so a lot of investors have tried to take down the number of expensive companies in their portfolios. This is a good company, but it’s in the wrong place in the industry long-term. They will continue to be under assault from companies like Amazon (AMZN-Q). He would rather be a shareholder in Amazon.

There was a weakness in all the defensive names in 2016, but not pronounced as much in this company. The worst is now over and he can see some limited upside, probably running into some resistance at around $83. He has a technical target of around $85. They’ve made some good progress over the last year in changing some of their business lines. A good holding. Dividend yield of 2.8%. (Analysts’ price target is $73.)

They are getting squeezed. Retail is either going to the dollar store or on line. These guys tend to move as a sector.

He tries to assess how visible a company’s long term cash flow growth is going to be and this is hard with Wal-Mart. 70% of revenue comes from the US. 55% of revenues are from groceries. He is concerned that longer term it will be very difficult to forecast free cash flow for them. This is why he does not own it. E-commerce is 5% of WMT-N sales.

*Short*. A good company, the largest retailer in the world, but that is one of the problems. How do you grow, especially when growth is 56% of your business. You have everything from organic producers to super discounters fighting you. It is hard for them to move the needle and increase their margins. They’ve been trying to ratchet down street expectations by 15%-20% over a multiyear period. Their consumer is predominantly lower and middle class consumers, who are more impacted by gas prices and probably not going to benefit from Trump’s rhetoric of “America First”. Dividend yield of 2.92%. (Analysts’ price target is $73.00.)

(Market Call Minute.) Amazon (AMZN-Q) is just going to cream them in so many ways.

(Top Pick Feb 5/16, Up 5.84%) They were higher, but fell a little bit. This one got hit a little bit more than the sector. It is going to focus on its comps and its digital business. It is doing a bit of base building. You get paid nicely to hold it now. If it does not hold $65.80 then he would be concerned. It looks good here at this level.

If Chinese imports are taxed, it will really hurt Walmart. Don’t buy above the 52 week lows.

This caters to the low to middle part of the market, which is Donald Trump’s market. If he does what he says and it works, this company will benefit long-term because their customer base will benefit. On the negative side, they are subject to Amazon (AMZ-N) eating away at their bottom line, stealing their customers who order things regularly. Retail is not an area he is interested in buying.

He is underweight a lot of US retailers. This one could be negatively impacted by border adjusted tariffs, which would certainly have an impact on their bottom line. He doesn’t own this, primarily because of secular growth concerns. E-commerce and Amazon are having a big impact on their business. Valuation is not all that compelling, and you are looking at flat earnings growth during the next couple of years.

*Short* Largest retailer globally. A phenomenal company that has had a virtuous cycle of buying for less and selling for less, but unfortunately it is hard to see incremental new growth. It is getting attacked by the Amazons of the world. They do have an e-commerce platform, but it is really not going to move the needle. This could have a very substantial impact if the US border adjustment tax were to come in. Dividend yield of 3.01%. (Analysts’ price target is $73.93.)

Not a huge fan. It is becoming tougher and tougher for them to grow revenue. They already have stores right across the US, so you have to question how they are going to grow. They will continue to open stores, but they are already penetrating all major markets in Canada and the US. The next question is, will they go global. That is what they will need to do to see any meaningful lift from here. With the online shopping that is available, it is putting a lot of pressure on this company.

He would rate this as a Sell to a Hold. He is concerned about the long-term future in terms of generating the earnings growth. They are pretty saturated across North America. Expansion is going to have to come internationally, and they had to give up in Britain. They can only tighten margins so much. Where they are really going to be in jeopardy is if some huge protectionist bill comes in. There are a lot of better places to be.

He likes this company, because it has a 3%+ dividend, giving you some ballast, and defensive characteristics should this market get volatile. It is also good if you are sceptical somewhat of the US economy taking off. This company tends to outperform when the market is going down. It has pulled back in the last few weeks.

They have some catch-up to do on their on-line business. 70% of products are from China and that could be a major headwind for them as well as every other retailer.