Walmart Smart Shoppers Will Hit the Sell Button

Owners of Walmart (WMT) shares have been given a gift. They should readily accept it.

Why do I say that? Check out the 2013 through 2020 data shown below and judge for yourself. This year's figures are based on management's guidance presented at WMT's recent earnings report.

Last year finished with EPS of $4.93, up a pathetic 2-cents year-over-year. Amazingly, that was better than the full seven-year expectation, which would tally a small cumulative EPS decrease since the end of 2013.

Surprisingly, Walmart's shares provided 87.1% in total return even as profits stagnated. By definition most of that gain was due to price-to-earnings, or P/E, expansion. The rest came from dividends, which increased each year despite poor results. 

 Walmart's average P/E since 2010 was 15.4-times, accompanied by around 2.53% in current yield. As of Wednesday, WMT fetched 23.2-times its forward estimate for 2020, while paying just 1.84% on the recently boosted dividend.

Traders are paying a premium multiple and accepting paltry yield for no apparent reason. That situation rarely persists.

From 2011 through 2017, WMT's five best entry points (green-starred below) all reflected discounts to the stock's normalized P/E. Each also provided above average yields. Exactly the opposite valuation pattern is in effect today.

All four of WMT's historical "should have sold" moments (red-starred) were marked by over-generous valuations and sub-par yields. 

A regression to a still-above average, 16-times multiple, suggests Walmart could fall to near $81 by the end of this year. That implies over 31% downside. What logic can you think of that would lead to a gain?

Yahoo Finance, too, calls Walmart overvalued.

Independent research firm Morningstar agrees. It assigns WMT a well-deserved 2-star, out of 5, Sell rating. Morningstar deigns to provide year-ahead price targets. It does, however, share its view of present-day fair values for each stock it covers.

For WMT, that figure sits at $105, almost 11% below the stock's Wednesday quote. I would question even that as a true fair value as it implies WMT is worth 20.7-times this year's estimate.

Walmart shoppers know it's never a good thing to pay more than everybody else for the same merchandise. It's a stock market sin to pay a pricey multiple for no-growth companies.

Aggressive traders might wish to short WMT or even think about buying put options. Those long the shares would do very well to lock in gains that appear undeserved, before they vanish.

At the time of publication, Price had no position in the securities mentioned.