Wal-Mart Stores, Inc. (WMT), What Not To Do With Your Shares

Costco Wholesale Corporation (NASDAQ:COST) is a much inferior candidate to the mighty Walmart. Costco Wholesale Corporation (NASDAQ:COST) trades at a rich P/E of 21, while maintaining an operating margin of only 2.8%. Walmart’s operating margin is slightly above 6%. That’s more than double in favor of Walmart. Target Corporation (NYSE:TGT), on the other hand, enjoys favorable metrics that are similar to Walmart’s. But Target Corporation (NYSE:TGT) has been suffering lately from a severe decline in sales and loss of store location in favor of other rivals.

Neither company can compete with Walmart on price. Walmart’s discount nature is the major element that led it to become a $220 billion company. Since Walmart is roughly 3 times the size of Target and Costco combined, it greatly benefits from economies of scale – distribution channels, store locations and cheap merchandise are just a few of the things that Walmart outperforms other rivals.

How to take advantage of this fear

You can go and buy shares outright in the open market or you can sell put options on the underlying asset (shares of Walmart). Specifically, you can sell the May $75 puts for $1.44.

If Walmart holds its level or rises higher, you get to keep the $1.44, no strings attached. That’s a 1.9% yield on your purchase obligation in about six weeks. That’s over 15% annualized.
If Walmart is trading below $75 come May, you will end up buying shares of this retail giant for a total cost of $73.56 ($75 minus $1.44). That’s a 2.5% discount to today’s price. It’s a win- win.

A Fool’s view

Walmart has always been an outstanding company in the retail sector. Its dominance, distribution channels and appealing prices place it in the center stage of retail. There isn’t any news announcement that can change that.

Shmulik Karpf has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool owns shares of Costco Wholesale.