Sometimes as an investor you have to know when to ignore bad information. It’s difficult to do because there is so much of it floating around. What I try to do whenever I read something about a stock I follow is, see if you can punch holes in the theories being presented. If you can’t find anything wrong with the person’s theory, then you add it to your knowledge about the company and adjust your thinking accordingly. With this in mind, I want to check out an article I recently read about Wal-Mart Stores, Inc. (NYSE:WMT).
4 Reasons to sell the stock
I stand behind everything I’ve written and I hope that other authors do the same: however sometimes a post gets my attention and seems to call for a response. Consider this my response to a recent post about “Why Walmart Is A Sell.”
To be clear, I don’t currently own Wal-Mart Stores, Inc. (NYSE:WMT), and I don’t have a problem with the idea that popular stocks sometimes should be sold. This article suggests there are at least four reasons to sell the stock. Let’s see if these theories make sense.
#2 – U.S. Growth is slowing to about 1%
#3 – Walmart customer satisfaction is terrible
#4 – Valuation is on the higher side
2 things that never change
First, Walmart is no stranger to competition. Companies like Amazon.com and eBay Inc (NASDAQ:EBAY) are forcing the world’s largest retailer to rethink some of its strategies. However, in Walmart’s last earnings report, the company indicated that it took market share in the grocery, home, and electronics categories among others.
From a numbers perspective, Wal-Mart Stores, Inc. (NYSE:WMT)‘s gross margin has compressed just slightly over the last few years, from 25.34% in 2011 to 24.85% in the company’s most recent quarter. However, most of this compression has to do with the company’s focus on trying to take grocery business, which is a lower margin endeavor.
While it’s true that some of Walmart’s competitors have better gross margins, this isn’t true across the board. Amazon’s best gross margin was just over 24%, and Costco routinely runs a gross margin in the mid-teens. While Target Corporation (NYSE:TGT) and Family Dollar carry margins of 28.88% and 33.42% respectively, these retailers don’t have the same grocery offerings as Walmart.
The second reason to consider Wal-Mart Stores, Inc. (NYSE:WMT) stock is, the company seems to continue growing sales in spite of its customer satisfaction measurements. In one sentence the post says that Walmart’s customer satisfaction is, “going down the drain.” However, in the next sentence the same piece says this is, “the sixth year in a row that the company has either tied or taken last place” (in an American Customer Satisfaction survey). However, Walmart has grown overall sales by 4.5% on average in the last five years. As a former manager of mine once said, Walmart ought to just change their slogan to “our service is terrible, but we know you won’t care because our prices are so cheap.”
The slowing growth illusion
The aforementioned article said that Walmart’s U.S. Growth is slowing to about 1%. Unfortunately, that statement is just flat wrong.
This brings us to the third reason to consider the stock. Last year, Walmart opened 3.26% more U.S. Walmart and Sam’s Club locations and reported a 2% increase in same-store sales. In addition, Walmart actually opened 8.79% more international locations. Between stealing market share from traditional grocers, and opening new stores internationally, Wal-Mart Stores, Inc. (NYSE:WMT)‘s growth isn’t slowing at all.