Today I opened a position in Walmart. Below is my rationale. I provide this commentary for educational purposes because although it’s specific to WMT, it illustrates my general trading thought process.
- I believe the stock has been oversold because of two primary fears which will be overcome- employee pay raises & weakness of overseas sales.
- Recent pay raises will be offset by layoffs or attrition, thus normalizing productivity.
- The strength of the US dollar, which has hurt international sales, will increase domestic profits by improving margins on products sourced from China (lower costs won’t be passed onto US consumers). Operational profits should also improve due to lower transportation costs and declining commodities. [This may take time to show up in the bottom line and if need be, I’m willing to wait.]
- The stock price has displayed positive relative strength, holding up well in recent days while the market has struggled. It has also consolidated and stabilized over the past two months, with support near $71.
- I estimate fair value of at least $80, which is >10% above the current price. (see below chart)
- I’m buying in anticipating of a positive earnings announcement next week…this is RISKY. However, if I’m correct, the price could be propelled well above its 50dma. [Trading stocks involves risk.]
- If things fall apart because of a bad earnings announcement or due to a general market decline, I might consider holding onto WMT because as mentioned above, it’s reasonably priced and it may take time for my profit assumptions to work through the supply chain. Walmart is a stable company and pays a respectable 2.7% dividend. That should help maintain price support near $71 if things get temporarily ugly.
How will Walmart perform next week after announcing earnings? I have no idea. I’m optimistic but will reconsider my current position when new information is available.
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