Walmart Stock Begins Comeback After 26% Plunge

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Walmart Inc.’s (WMT) shares have been punished by investors in 2018, plunging nearly 26% from their January highs. Now, Walmart’s stock is mounting a comeback. The shares have commenced a rebound from their lows in mid-May, and now options traders are aggressively increasing their bets that Walmart will rebound another 6.5%. In total that would amount to a gain of more than 14% from two months ago.

The technical charts also suggest that a breakout is underway and continues to build positive momentum. The rising levels of optimism come ahead of what is expected to be strong fiscal 2019 second-quarter earnings when the company reports in the middle of August. Investors will be laser-focused on the retailer’s e-commerce growth. Walmart’s disappointing online sales growth was what sent shares crashing down in late January. 

WMT Chart

WMT data by YCharts

A Rise to $93.5?

Options traders have been betting heavily the stock will rise. There has been increasing activity in the $92.5 calls set to expire on Sept. 21 over the past couple of weeks. The number of open call contracts at that strike price have nearly tripled over the past two weeks, to roughly 19,000 open contracts. The calls trade at approximately $1 per contract, and the stock would need to rise to about $93.50 by options expiration for a buyer of the calls to break even. The wager isn’t a small bet either, with a dollar value of almost $2 million, a sizable wager. 

Improving Technicals

The technical chart shows strength, rising just below a critical support level at $88.20. Should the stock be able to rise and remain above that support level successfully, the chart suggests an increase to about $93.50. The chart also appears to have a technical pattern referred to as a triple bottom, a bullish technical reversal pattern, which suggests that shares will rise, too. Additionally, the relative strength index has been steadily trending higher, indicating bullish momentum is coming back into the stock. 

Weak Growth

The company is expected to report Q2 results in mid-August. Analysts are forecasting strong earnings growth of about 12.7%, while revenue is expected to rise by roughly 2%. The one hurdle the company will continue to face is slow earnings and revenue growth. Full-year fiscal 2019 earnings are seen increasing by approximately 9% and revenue by 3%. That growth is expected to slow in fiscal 2020 to roughly 4% and 3%, respectively. 

WMT Annual EPS Estimates Chart

WMT Annual EPS Estimates data by YCharts

It makes shares of Walmart rich even at current levels, trading at 17.6 times next year’s earnings forecast. 

The big question mark is whether Walmart can get its e-commerce business growing fast enough to give investors the incentive to pay an above-market multiple for subpar earnings growth. If the company is unable to do that, the rebound may be nothing but a dead cat bounce. 

Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company’s actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer’s bio and his portfolio’s holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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