Walmart: Betting Against Bentonville (NYSE:WMT)

Guilt provides far more effective motivation than greed. For greed, at times, can be satiated.”― L.E. Modesitt Jr., Imager.

The rally in the market in the first half of 2023 was largely powered by the largest companies by market cap, including a 55% return in Apple (AAPL) and an almost 200% return from NVIDIA Corporation (NVDA). Another mega-cap that had a solid first half of the year was Walmart Inc. (NYSE:WMT). This despite lingering concerns about the strength of the consumer, who has lost more than three percent of her buying power to inflation since the beginning of 2021. The stock in this retailing behemoth from Bentonville, Arkansas, is up better than 10% in 2023 – and nearly 30% (including dividends) over the past year.

However, at current trading levels, Walmart investors seem to be overpaying for limited earnings and revenue growth. There are several reasons I believe the shares could be vulnerable to a pullback in the overall market. This is a scenario I believe is likely as I outlined in this recent article. I think WMT is at best dead money through yearend 2023, and if the market “hiccups,” the stock could easily see a 10% to 15% pull back. I outline those reasons below and offer up a trade idea to asymmetrically profit from this scenario should it play out via the analysis below.

Valuation:

The law of large numbers is catching up to Walmart. The company has grown so massive, it is hard to move the needle on growth even as the company has a solid management team and good operational execution. Current analyst projections have the company delivering just over $635 million in sales in FY2023, which would be a four percent increase over FY2022. If one takes into consideration current inflation levels, this translates to roughly flat volume growth it should be noted. Earnings are expected to be flat in FY2023 with a median analyst projection of $6.24 a share, a nickel below FY2022 results. Earnings of $6.88 a share in FY2024 on low single digit revenue growth on average are expected by the analyst community.

So, what are investors paying for this pedestrian growth? At current trading levels, WMT trades at just over 25 times forward earnings. Competitor Target Corporation (TGT) is trading at just over 15 times forward earnings in comparison. Now, Target is having some well-documented issues, and I recently posted a take on the company, but Target’s earnings are projected to grow faster than Walmart both in FY2023 and FY2024. TGT also pays a 3.3% dividend payout compared the paltry under-1.5% yield WMT holders are currently receiving. And risk-free short-term Treasuries are yielding north of five percent currently it should be noted.

Technical Ceiling:

As you can see from the graph above, the stock is now hitting up against a level it has failed to broach in a meaningful way since late 2020. Near all-time highs, the stock could hit and fail at this technical resistance once again.

Insiders & Analysts:

Insiders are selling huge amounts of stock in the company on a monthly basis. Yes, the Walton family is one of the richest in the country and most of the sales are probably being done for estate planning and philanthropic purposes. But sales amounted to tens of millions of shares just in June (not dollars).

More than a dozen analysts including Morgan Stanley, Wells Fargo and Jefferies have reissued Buy ratings on Walmart since the company last posted quarterly results on May 18th. However, most analyst price targets are just 5% to 10% above the current trading levels of the stock. With a market cap of approximately $425 billion, the stock has a very low free cash flow yield over the past four quarters.

WMT has a projected five-year PEG ratio nearing 3.5 currently. Maybe if the stock carried a four percent dividend yield it might be more investable. Or if the country was coming out of a recession and faster economic growth was in the cards for the quarters ahead. Unfortunately, low GDP growth is projected going forward. With a hugely inverted yield curve, manufacturing in contractionary territory, the Leading Economic Indicators falling for 14 straight months and still more rate hikes on the horizon, a recession over the next year seems a distinct possibility.

Only just above one percent of the outstanding float in Walmart stock is currently held short. I prefer the bear put spread strategy to act upon any pullback in the stock and which is highlighted below. If I am right and the market sees a selloff over the next five and a half months, I am likely to make $10 on a $1.75 bet if WMT just once again tests the $140 area which the shares did three times in the first quarter of this year.

Please fully understand the benefits and risks of options trading as outlined here and familiarize yourself with how options operate. It may be appropriate to use a trusted financial advisor before placing any options trades.

Option Strategy:

Using the December $150/$140 strike pair, execute bear put spreads for a net debit of $1.70 to $1.80 a share. If we do get a significant decline in the overall markets and WMT pulls back just 11%, this trade will provide an a better than five-to-one return. An approximate six percent decline puts this trade in break-even status. In the case WMT moves higher over the option duration, it is likely the bull market is continuing, and the other parts of your portfolio are rising. As such, this trade acts like portfolio insurance to some extent.

Trying to have everything will often leave you with nothing.”― J.S. Felts