Investors finally give Wal-Mart the green light

After years of improving performance, WMT deserves to be at decade-long highs.

By InvestorPlace May 24, 2012 9:47AM

By James Brumley

 

It might have taken 12 years, but it was worth the wait. After being stuck in a trading range since 2000, Wal-Mart (WMT) shares are finally rolling again. As such, traders can move the world's biggest retailer's stock from the "stodgy dead money" bin to the "it's a player" bin. Seriously.

 

What's even more amazing is how the stock genuinely deserves the newly mustered interest, even in the face of some embarrassing problems.

 

Finally!

Although many investors had left Wal-Mart stock for dead years ago because it seemed perpetually stuck in a range between $42.30 and $63.85, its recent rally has breathed new life into an old stock. Wednesday's close at $64.58 is the highest the stock has been since briefly peaking at $69 in January 2000.

 

Perhaps more important, the current dance with the $64 area doesn't quite feel like the last two times WMT toyed with a break above a big ceiling, both of which failed and ultimately sent the stock back to $43.20. This time around, Wal-Mart shares have a healthy degree of sustainable momentum, and few people are calling it overbought.

 

Indeed, when investors stand back and look at the whole picture, the story actually is quite logical -- earnings have been rising consistently since 2000, stumbling only modestly in 2008. The stock should be rising over time, reflective of the growing bottom line. The only real surprise should be that it took this long for shares to get up and go.

 

Yet the whole thing prompts another question: If earnings have been rising and the stock was stagnant anyway, what got investors past the mental roadblock of choosing not to reward the stock despite the company's success?


This is where it gets really interesting.

 

A multipronged overhaul

It might not be rational, but investors (even the institutions and "smart money") make choices based on feelings rather than proven results. Wal-Mart is no exception to this reality. While Wal-Mart's reliable -- almost creepy -- income growth is top-notch, would-be buyers of the retailer simply couldn't get past its non-fiscal tripwires.

 

Nagging labor problems are one of those stumbling blocks. Gender discrimination, unpaid work time and miserable benefit plans have been some of the chief complaints about working for the retailer.

 

Then there's concern that Wal-Mart is poised to ultimately lose to more focused and better-executed competition. Take Target (TGT). The two retailers go head to head in terms of price on most everyday items, but there's little doubt that Target's "cheap chic" has made it a top-of-mind choice among people shopping for value-priced apparel. In a similar vein, though many Wal-Marts now offer groceries, few have been viewed as a better grocer (or a lower-priced grocer) than fully focused grocery stores like Kroger (KR).

 

Then there are the stores themselves. A big chunk of them look like they were built in the 1980s and early '90s. That's because they were and haven't been touched since. Several also look like they haven't been cleaned since the 1980s or early '90s.

 

These are all details potential investors can't just shrug off, which might explain at least part of the reason the stock has been stuck in the mud for more than a decade.

 

Well, guess what -- things are changing. The change has been gradual, almost to the point of being imperceptible, but the retailer finally has started to win back some of its '90s street cred. Investors have started to notice, too.

 

Not yesteryear's Wal-Mart

Labor issues? Though the echoes of those problems still are ringing, the corporate culture is evolving (following a multimillion-dollar suit) on that front.

 

Competition? Target's still winning the cheap chic war, but Wal-Mart has figured out that if it wants to really do well in the grocery business, it has to get better. And it is. The company has borrowed a page or two from Whole Foods Market (WFM) by introducing organic food and healthy choices in its grocery aisles, and it has found good success with it so far.

 

Dated stores? Though it's the biggest and costliest undertaking among these three, it's also happening -- it's just happening in stages.

 

Though the overhaul isn't finished, the company is off to a great start.

 

And what about the black eye stemming from the recent bribery scandal in Mexico? The fallout is more bark than bite. Jim Woods makes a sadly accurate point about the matter: It's going to be forgotten in a matter of weeks.

 

Bottom line: Earnings growth was never the problem. The problems holding the stock back were all off the books. Now that those challenges are withering, the stock is getting its due. It's a trend that could last awhile, too, now that the ball is rolling for all the right reasons.

 

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

 

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15Comments
May 24, 2012 11:16AM
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The more we dislike Wal Mart the better the dam big box store does, and the worse for the smaller true American people trying to survive!

May 24, 2012 11:56AM
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Wal-Mart doing well is not necessarily the most positive sign there is.  Think of it, the stores are noisey, crowded, with poor customer service, long lines, rude staff, and sometimes dirty.  They don't exactly have the best reputation in the public consciousness; and the one thing they're known for is being cheap/low prices....  People don't really like them, but go there for "bargain basement prices".  Perhaps, just perhaps if people are willing to shop at places they don't really care for, and at times loathe going into, it's because they NEED the savings, just to survive financially...  If they were on firmer financial footing, they might be more inclined to go to a place they'd prefer shopping at.

 

Basically, not everyone necessarily shops at a place they loathe or dislike going to, in the name of saving a buck, unless they don't have the money to go where they like.  If people had more disposable income at their disposal, they might, just perhaps make different choices.  I mean look at how many stop going to resturants that serve a sit down dinner, and a decent dinning experience, to settle for fast food durng a recession.  Is it because people prefer a big mac to a steak dinner?  Now, when the ecconomy starts doing better, look at how many would be more inclined to spend a little more on a meal, that could be tastier, with a better dinning experience....

May 24, 2012 3:47PM
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@Nuad ormrac...you stated, "If people had more disposable income at their disposal, they might, just perhaps make different choices."  

That's real rocket science there!!  That's called being a consumer!!  Isn't this true with just about everything we buy in life?  Heck, if I had more disposable income, I might drive a BMW instead of a Chevrolet.  I might choose to grocery shop at Whole Foods all the time instead of just some of the time.  I might live in a $450,000 house instead of a $310,000 house.  It's all relative.  

Also, I don't think Walmart ever gets enough credit for their stores.  Believe it or not, many people shop there because they like to shop there.  They like the variety and convenience, perhaps not just the prices.   
May 24, 2012 11:56AM
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I won't buy Walmart stock unless Cramer tells me it's ok.
May 24, 2012 11:58AM
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Not to be facetious, as my previous post, WMT here is upgrading stores, and several small grocery-heavy "local-neighborhood" units are under construction. 130,000 population, 5 WMTs incl. 3 superstores, plus new construction, only one Target. Pretty impressive.
May 24, 2012 11:44AM
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Wal-Mart will take a bad store apart and rebuild it. Now that it is concentrating on US stores that have been open more than a year, the hidden profits will gush up.
May 24, 2012 1:40PM
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So don't the Chinese own most of the ChinaMart stock anyway? Guess they're buying more.

 

Peace

May 24, 2012 11:44AM
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If they don't have it at Wal Mart, you don't need it.
May 24, 2012 12:09PM
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love the report...eh..labor issues..who cares..consumers..we're saving money...jobs? China is fully employed and with wall-mart..a great trading partner...china will squeeze their workers and wal-mart will squeeze theirs..one big happy family..however China is bringing up their workers standards (i guess there is no way to go but up) while workers standards in america are declining..Viva wal-mart  and Happy investing.I love wall streets amoral approach.
May 24, 2012 10:53PM
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WAL MART your average cities retail version of a five dollar hooker. Cheap and ugly with a bad attitude

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