Is This Blue Chip a Screaming Bargain or a Screaming Sell?
It’s one of the biggest and best retailers in the world with a market cap of more than $230 billion and more than 11,400 stores around the globe. These include discount stores, supermarkets, supercenters, warehouse clubs and restaurants, along with retail websites. It’s been around for decades, withstanding the boom and bust of economic cycles, and it is a member of the venerable blue-chip Dow 30.
For income-minded investors, it has a history of steadily increasing its payout, with its quarterly dividend rising more than 60% in the past five years. It currently throws off a forward annual yield of 2.7%.
Shares look cheap, according to their price-to-earnings (P/E) ratio of 14.7. That’s more than 20% below the S&P 500’s P/E ratio and 30% below its industry average. And they can be scooped up now for a 20% discount to their January high.
If you haven’t yet guessed, I’m talking about Wal-Mart Stores (NYSE: WMT). And while I’m sure there are plenty of investors who would like to pick up shares of this retail behemoth on sale, I must caution against it.
On closer look, WMT is anything but cheap. And one of the most accurate indicators I know of is telling us that this is NOT the time to buy.
Not Every Sale is a Good Deal
While lower fuel prices put more money in consumers’ pockets, this extra disposable income was not a big boon for Wal-Mart in the most recently reported quarter. Nor do analysts expect that it translated into significant benefits in the company’s fiscal Q2 2016, set to be reported on Aug. 18.
Additionally, a number of things are likely to weigh on future earnings, at least in the near term.
These include strength in the U.S. dollar, increased health care costs and higher wages for 500,000 full-time and part-time associates. Management said it would spend approximately $1 billion in the first half of fiscal 2016 on additional training and a wage hike for entry-level employees to $9 an hour. A further increase to at least $10 an hour is expected by February 2016.
Wal-Mart is also spending heavily to build-out its online retail channels to take on rivals such as Amazon.com (NASDAQ: AMZN). Wal-Mart said it plans to invest between $1.2 billion and $1.5 billion in its global e-commerce efforts this fiscal year, which included buying out the remaining stake of Yihaodian, its Chinese e-retail business, earlier this month.
But despite throwing cash at the issue, Wal-Mart has a lot of catching up to do. Its roughly $12 billion a year in e-commerce sales is about eight times less than Amazon’s, according to Sure Dividend.
WMT is More Expensive Than it Looks
Even with these fundamental headwinds, investors may point to WMT’s relatively low P/E ratio as a reason to buy. But a more dynamic earnings metric actually shows it may be overvalued by nearly 250%.
The PEG ratio is a metric that compares the P/E ratio to the earnings per share (EPS) growth rate. It offers a way to determine what the P/E ratio of a stock “should” be.
Analysts assume a stock is fairly valued when the PEG ratio is equal to 1. This occurs when the P/E ratio is equal to the EPS growth rate. A PEG ratio below 1 indicates a stock is undervalued, and a PEG ratio above 1 indicates a stock is overvalued. WMT has a PEG ratio of 3.47, signaling it is significantly overvalued.
Technicals Paint a Bearish Picture
WMT has spent all of 2015 thus far correcting from its sharp rally late last year. Shares undercut a two-year support low and broke an important 30-month uptrend, which is now formidable resistance.
The next major downside support levels are $68, the low from October 2013, and $63, the low from November 2012.
WMT also collapsed through long-term support at the 200-day moving average. As history has shown, when WMT trades this far below its 200-day, it suggests the stock is ripe for volatility and a longer-term consolidation.
But my main reason for being bearish on WMT is something you’ve probably never heard of…
My No. 1 Reason for Selling WMT
It’s an indicator that only a handful of traders know about. It ranks every stock on the market from best to worst. And WMT currently ranks in the bottom 36th percentile of the 3,922 stocks in my database.
Stocks with low ranks have consistently underperformed the market while stocks with high ranks have been shown to deliver huge gains.
While I don’t have the space to go into the specifics of the indicator here — not to mention I like to limit the number of people who know about it to maximize its effectiveness — I’ve agreed to share it with a few traders. If you’re interested in being one of them, follow this link to learn about the most powerful indicator you’ve likely never heard of.