At a quick glance, circumstances don’t appear auspicious for big-box retailer Walmart (NYSE:WMT). Yes, the company delivered strong results for its fiscal fourth-quarter earnings report. Regarding the headline print, Walmart posted adjusted earnings per share of 66 cents, beating the consensus view of 64 cents.
Also, revenue reached $180.55 billion, also pipping analysts’ consensus target of $180.01 billion. Still, it wasn’t enough for investors, with WMT stock losing 6.5%.
Although the Q4 performance exceeded expectations, the market represents a forward-looking arena. It’s here where the retailer fell short. Management warned that profit growth will slow this fiscal year even as sales continue their ascent. Specifically, the company expects net sales to expand by 3% to 4% and adjusted operating income to rise between 3.5% to 5.5% on a constant currency basis.
Overall, full-year adjusted earnings may reach only $2.50 to $2.60 per share. That was well off from the $2.76 per share that the Street had anticipated, contributing to the fallout in WMT stock.
Fundamentally, President Donald Trump imposed tariffs on imported goods from Canada and Mexico, along with key economic partner China. As the leader in everyday low pricing, tariffs will necessarily impact Walmart’s business. Further, consumer inflation — which has already caused a cynical boon in gold stocks — could crimp the company’s core consumer base: regular families looking for a discount.
Still, all things considered, WMT stock itself could be the discount that everybody wants.
First, Walmart commands incredible pricing power and scale. Since you really can’t get lower than Walmart in terms of pricing, it owns the floor. Plus, because it’s such a massive retailer, it can pressure suppliers to pick up some of the slack from the increased costs from tariffs.
Second, we’ve seen this narrative before. Recall that in 2019, management warned that it would be forced to raise prices due to the trade war at the time with China. A quick look at the long-term chart for WMT stock reveals that the equity was ultimately no worse for wear.
WMT Stock Demonstrates Resilience to Pressure
Another factor that makes Walmart stock intriguing is the underlying statistical tailwind. Using data since January 2019, a temporal or stochastic view reveals that a position entered at the beginning of the week has about a 55% chance of rising by the end of it. Over a four-week period, the long odds improve to between 60% and 62% (with the discrepancy coming from the handling of 0% returns).
However, it’s important to view data not just temporally but also dynamically; that is, accounting for the relevant circumstance currently at hand. For example, WMT stock is on pace to lose more than 6% this week. When the security has given up between 5% to 10% in a one-week period, the subsequent five days sees long odds rise to around 67%. These odds stay consistent for the next four weeks.
To be fair, we’re talking about an extremely small dataset. However, it’s also fair to point out that big weekly losses are rare for Walmart. The median loss during negative weeks comes out to only 1.43%.
Now, during the times when WMT stock bounces back from relatively extreme volatility, it posts a median return of 2.89%. By logical deduction, WMT could be on track to reach just over $100 based off the most recent close of $97.21.
If you’re a gambler, take a look at the 97.50/100 bull call spread for the March 21 expiration date. A less-than-3% move could potentially yield a payout of more than 131% if the odds play out as expected.
— Josh Enomoto
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Source: Money Morning