Walmart Inc (WMT)

(Top Pick Nov 25/14, Down 31.08%) He still has HD-N, but along the way it became clear that secular growth was the most attractive in this market. Part way through the year he rotated to AMZN-Q.

Has a few headwinds. First is the FX. 30% of revenues come from outside the US. Secondly, labour costs are going up with them. They need to try to keep the people they have on staff on board, and their wages are moving higher. Another thing that is affecting this company is their foray into more of the e-commerce type of space, and trying to compete against companies like Amazon, etc. That is going to cost them money. The long-term growth rate is looking pretty paltry at about a single digit growth rate.

CEO came out with a warning for the next couple of years talking about slow growth, and the stock has been in a downward struggle at the same time. It conceptually makes sense that if you get all the bad news out, something should help along the way. A lot of that has already been baked into the price. There is a negative cloud hanging over this and you want to see something that has a positive stimulus. Technically it is in a downward trading channel. On top of that, we are no longer in the seasonal period for consumer staples.

This has struggled a lot of late. It caters to people in the lower half of the income demographics. While he is still thinks it is a great retailer, it is just not growing very much and it is very hard to turn it around. E-commerce is eating away at it. It has benefited from lower fuel costs, but he just doesn’t see an identifiable catalyst to get it growing.

It has struggled this year, down about 25%. He likes what they are doing in terms of a go forward strategy. They plan to open more stores. They are now price matching the prices of on-line retailers. They are getting into the organic side in groceries. They will be taking their customers up the price scale to more expensive products. He is not in a rush to buy this name, however. See how the initiatives play out.

This bottomed out in valuation in 2008. He has a model price of $85.53, a 28% upside and there is support. There is an incredible amount of value here, but the market doesn’t care, because it is not growing.

For a long-term investor, this is probably a reasonable entry point. It has been a tough couple of years for them, but he thinks they are making all the right moves to improve the earnings pace. They keep buying back a lot of stock and raising the dividend every year.

There has been a lot of discussion about Wal-mart and Costco. Wal-mart made its 52 week low. He doesn’t pick bottom or devalues. The dollar stores have fundamentally changed the backdrop for Wal-mart. Thinks that there are better places to be.

The problem for her is that this company really has been growth. One of the concerns is on the labour side and their costs going up. They have always been pretty good at managing those costs, but overall, for a company of that size, it is hard to get more than a GDP plus a little bit of a story. The consumer has been very selective. Where they have been spending their money is on their houses.

Wouldn’t be opposed to buying this. It is a high-quality name. They are benefiting from the economy of scale with over 11,000 stores and are forecast opening 400 more this year. To combat some of the online competitors, they will match prices. Rolling out a partnership with a company called Wild Oat, which is going to sell organic food at 20% less than the competition. If they start to gain some traction with that business, he thinks there will be lots of upside. Trading at only 15X PE.

Chart shows the financial crisis peak in 2008 followed by a very weak rally rebound from 2010 to 2011. It finally broke out of the old peak in 2012. There has a primary trend line running from 2013 to 2015, and a shorter chart shows that that primary trend line has been broken. However, the chart does show support at around $72. He wouldn’t be shorting this right now. Also, when you get a market this nervous, money tends to go into safe consumer discretionary areas.

It has a lot of margin pressures and is raising wages. They are putting the screws to their suppliers. The $70 area is the next support and then the next one is in the $50s. He could see a breakdown next year. Only get a half position if you like the company long term.

The fundamental problem is that they are so big that it is hard for them to grow. A lot of gas price savings have been saved instead of being spent at Wal-Mart. We still have not seen consumer discretionary spending pick up. The economy has become so good that people are spending money on big ticket items instead of at places like Wal-Mart. This should improve over the next couple of years.

This fits well into his categories. It could pull back to $64.25. He has a model price of $94.46, a 31% upside. This is one of the largest consumer discretionary stocks out there that is hitting 52 week lows.

Most of the business done here is not discretionary. In fact over 50% of the revenue derived is food. The person who shops here is the average American who is watching the budget and where lower gas prices are very, very meaningful. He is not sure management is doing the kind of job that would warrant him committing his clients’ funds to the Company. Not convinced this is a good place to be.