Walmart Offers Lots of Bargains -- Except for Its Shares

Regular readers of my columns know I love to buy stocks when their share prices only partially reflect past growth. That's when they primed to make "catch-up" moves higher while arbitraging away that value disparity.

Stocks that far outpaced their own company's fundamentals offer exactly the opposite prospects. By definition, they have experienced price-to-earnings expansion, which accounted for "better than called for" share price performance.

Those kind of stocks figure to regress toward normal and typically do badly for holders who don't unload while the opportunity to "cash in high" is available.

Retail behemoth Walmart (WMT) clearly falls into that category. Over the past decade cumulative growth across all major business metrics was quite low. Despite those meager gains WMT shares saw 173.4% total returns.

The only way that can happen is through price-to-earnings expansion. Walmart went from about 11-times earnings in 2021 to 27.7-times profits at its peak in late 2020.

It should be no surprise, then, to hear that WMT is lower today than it sat back then despite posting all-time record EPS this year.

WMT has been a serial disappointment on fundamentals for a long time. Its five and 10-year rates of change were barely positive. Value Line sees only slight improvement on that via its projections out to 2026.

Paying almost 28-times last year's EPS was insane. As of Tuesday, Walmart still commanded over 21.1-times its fiscal year 2023 estimate. Its fiscal year ends Jan. 31, 2023.

What is WMT really worth?

Unless things go much better than expected ... if the stock reverts back to a more typical 18.1-times multiple, it will only fetch about $123 in about 15 months from now. That suggests about $20 of downside risk (-14%) from its recent quote.

The three times WMT got popular enough to trade near 20-times earnings or above it experienced significant pullbacks. During 2015 it fell from $91 to $56.30. In 2018 it dropped from $110 to $81.80. From last fall's peak at $153.70 it quickly dipped back to $126.30.

Those who think record results guarantee good share price performance don't really know their market history.

The one-year chart below shows how poorly WMT did vs. the Invesco exchange-traded fund (QQQ) , the S&P 500 (SPY) ETF and the Russell 2000 fund (IWM) . While they were making major gains, WMT went south.

Further evidence of this phenomenon could be seen on Wednesday, when industry rival Target (TGT)  posted a nice earnings beat yet fell sharply.

Why did TGT sell off? Prior to the quarterly report, it was trading near its highest price-to-earnings in many years. From a recent all-time peak of $268.98, the shares were back to $253.45 as of 12:38 p.m. on Wednesday.

Even after that decline, TGT remains far above its normalized P/E. At is 2021 peak it fetched over 20.2-times projected EPS versus a 10-year median multiple of 15-times. The only other recent time when TGT sold for over 20-times earnings came in mid-2013, at $73.50. By February of 2014, TGT was back down to $54.70.

Buying popular shares at way above average valuations is often a road to ruin for all but the most nimble traders.

If you own Walmart, it's not too late to sell. If you were thinking about buying on weakness, think again. The same applies to Target. Wait for much lower prices before committing to either of these shares.

At the time of publication, Price had now positions in TGT or WMT.