China

  • 15 Jun
    U.S.-China trade war could really hurt WMT

    U.S.-China trade war could really hurt WMT

    This morning marked the opening of yet another chapter in the drama that is U.S. trade diplomacy. The Trump administration announced this morning that U.S. Customs and Border Protection will begin to collect tariffs on the first $34 billion worth of Chines imported goods on July 6. This is the next step in the implementation of duties first announced in March of this year on approximately 1,300 different finished goods imported to the U.S. by its largest trading partner. The final $16 billion of a proposed $50 billion total of tariffs is still under review.

    This is a clear escalation of the two nation’s ongoing trade dispute, and not surprisingly China responded quickly, saying that they will act quickly to “take necessary measures to defend our legitimate rights and interests.” They have previously threatened their own set of tariffs on a wide ranging list of U.S. product ranging from soybeans and meat to whiskey, airplanes and cars.



    It’s one thing to watch the news and listen to talking heads wring their hands and bemoan the negative effects that an extended trade war would have on economic growth. And that’s not to say that they’re wrong; over the long-term, a trade war could bleed into virtually every part of the U.S. economy. Keep in mind that virtually every kind of finished product uses steel or aluminum, which is the basis for the first round of tariffs that Trump first started talking about three months ago. The real question for the average American is where those negative effects are most likely to be seen hitting their wallet. I think one of the first, and most vulnerable places can be found not far from where you live. Walmart Inc. (WMT) sources 75% of its merchandise from China, and that puts one of the largest retailers in the country literally on the cutting edge of what is happening right now.

    This isn’t an unrealistic argument; one of the ways WMT has always differentiated itself from its competitors is as the low-cost leader for consumers. The longer a trade war takes to find a resolution, the more their costs on the vast majority of goods that fill their shelves are going to rise. As you’ll see below, WMT simply doesn’t have much ability to absorb those costs to keep them from passing through to their customers. That begs a question that only each customer can answer: if that item – whether it be a shirt, a power tool, a toy, or an electronic gadget – that you’re used to getting from WMT costs 25% or more than it used to, are you going to be more or less likely to buy it?

    Current consumer trends suggest that in the case of luxury items – say, an $80 shirt – a lot of consumers that are already willing to pay that much for a shirt will probably also pay $90 to $100 for the same item. That is usually less true when the conversation shifts instead to bargain-priced items, like a $20 shirt. That puts WMT in the very difficult position of watching its operating margins erode even more by absorbing increasing costs to keep sales high or pass those costs to their customers, who may simply choose not to make the same purchases they used to. Neither scenario works out very favorably for the company’s bottom line.



    Fundamental and Value Profile

    Walmart Inc., formerly Wal-Mart Stores, Inc., is engaged in the operation of retail, wholesale and other units in various formats around the world. The Company offers an assortment of merchandise and services at everyday low prices (EDLP). The Company operates through three segments: Walmart U.S., Walmart International and Sam’s Club. The Walmart U.S. segment includes the Company’s mass merchant concept in the United States operating under the Walmart brands, as well as digital retail. The Walmart International segment consists of the Company’s operations outside of the United States, including various retail Websites. The Sam’s Club segment includes the warehouse membership clubs in the United States, as well as samsclub.com. The Company operates approximately 11,600 stores under 59 banners in 28 countries and e-commerce Websites in 11 countries. WMT has a current market cap of $246 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased by 14%, while sales grew a little over 4%. It’s hard for a company to grow earnings faster than sales, and generally not sustainable over time. I do take the difference, however as a good sign that management is doing a good job of maximizing their business operations. Diving a little deeper, however provides a good look at the reason you should be concerned about increasing costs from tariffs on Chinese goods. As of the company’s last earnings report, WMT had more than $500 billion in revenue, with net income of almost $9 billion. Net income is calculated by subtracting the costs of doing business from revenues, which it means it provides the baseline for the earnings per share number you and I use to measure a stock’s profitability. Comparing net income to total revenues gives you an idea about what kind of profit margin the company is working with. For WMT, that number is only 1.77%, a very low number that implies they work with very narrow operating margins.
    • Operating Trends: WMT has been doing a great job of growing revenues, and since late 2014 they’ve grown from about $470 billion to their current level of a little over $500 billion. Over the same period, the reverse is true about their net income, which has dropped more than 50% from a high a little above $17 billion to just under $9 billion currently. That negative trend is also reflected in the decline of net income as percentage of revenue, which was about 3.6% at the end of 2013 but, as already observed is now only 1.77%. The company’s margins have already been under considerable pressure for some time, which further bolsters the argument they just don’t have a lot of wiggle room to work with.
    • Debt to Equity: the company’s debt to equity ratio is .46, which is low and should generally be quite manageable. WMT has also done a good job decreasing their total long-term debt since the first quarter of 2014, from more than $45 billion to a current level of about $29.4 billion.
    • Dividend: WMT pays an annual dividend of $2.08 per share, which translates to an annual yield of 2.49% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for WMT is $26.44 per share. At the stock’s current price, that translates to a Price/Book Ratio of 3.15. This is below the industry average, which is 4.0, but inline with the stock’s historical average, which to me suggests the stock is fairly value right now, with limited upside potential in the long-term.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

    • Current Price Action: The stock has declined from a high around $110 in January to its current level around $83. That’s a drop of more than 25%, which at first blush might look pretty good for a stock that a lot of value investors would say has a lot of stickiness; that is, they will continue to generate high revenues even if a healthy economy begins to struggle, because consumers will continue to spend their money there. That is a true statement when it comes to WMT, but as observed above, I think the risk comes from what will happen as their costs increase. Will they continue to generate attractive profits, or will their margins erode? The risk is much higher they will erode.
    • Trends and Pivots: I’ve drawn two lines to illustrate where I think the stock’s real downside lies right now. The horizontal red line is just below the stock’s current level at about $82 and appears to be acting as good support right now. The horizontal blue line is drawn at the stock’s multi-year low, which was reached in February of last year at around $66. The red bidirectional arrow emphasizing the $16 per share difference between the stock’s current price and that low point is, I think a clear indication of investor risk right now. That’s a downside risk of just a little less than 20% right now. I also see little reason – fundamental or technical – to suggest the stock should reverse the intermediate-term downward trend anytime soon, which means that risk right now is much higher than any potential reward.
    • Near-term Keys: Watch the stock’s movement carefully over the next few days. A move to $90 would mark a reversal the intermediate trend’s downward strength and would act as a good signal point for a good bullish trade, either by buying the stock or working with call options. On the other hand, a drop below $82 would mark a major support break, with a drop to the aforementioned $66 level likely before any new significant support is reached.


  • 07 May
    What You Can Learn From Berkshire’s Annual Shareholder Meeting

    What You Can Learn From Berkshire’s Annual Shareholder Meeting

    This past Saturday, the Woodstock for capitalists was on as Warren Buffett and Charlie Munger held their annual shareholder conference.

    If you want to succeed in investing and reach your financial goals, this conference and the insights from it are all you need to listen to in order to learn about investing, what’s going on, and what to do about it.

    In today’s article, I’ll summarize what the key points to take out are and also save you the 6-hour watch.



    More →

  • 12 Apr
    Here’s One Way Chinese Retaliation Could Really Hurt Investors

    Here’s One Way Chinese Retaliation Could Really Hurt Investors

    • You don’t own Alibaba, and you can’t own it.
    • Today, we’ll discuss how Chinese companies list on U.S. markets and 10 risks that go alongside that.
    • Do you trust Jack Ma?



    Introduction

    Many of the stories out right now are about tariffs, trade wars, and the negotiations between the U.S. and China on trade. President Trump is playing hard ball as the U.S. trade deficit with China is huge and getting bigger. More →

  • 30 Mar
    The Dollar Is About To Lose Its Position As The World’s Reserve Currency – Here’s What You Need To Know

    The Dollar Is About To Lose Its Position As The World’s Reserve Currency – Here’s What You Need To Know

    A yuan-denominated future oil contract could be an historical game changer.

    A future oil contract is one where you buy a certain amount of oil for a future date. Since Monday, March 26, future contracts have started trading at the Shanghai International Energy Exchange. The Exchange is in a free trade zone which means that foreigners can trade on that market as well.



    Some say it’s the end of the Petrodollar while others say it won’t be able to compete due to the ease with which the Chinese government interferes with free markets, especially one where there is a lot of speculation that you never lack in oil markets and because the Yuan is a government-controlled currency. More →

  • 14 Feb
    Tencent Is A Must Own, But There’s A Big But…

    Tencent Is A Must Own, But There’s A Big But…

    • Tencent’s WeChat, China’s Facebook, has 800 million active monthly users.
    • The company is investing all across Asia and especially in the next China, India.
    • No one knows where Tencent’s earnings will come from in the next 10 years, but that’s the key to this investment.



    Introduction

    In today’s article, I’ll discuss investing in Tencent (OTCPK: TCEHY) by first giving you an overview of the company, and then by looking at the factors that could impact the business in the future in addition to comparing the fundamentals (growth) with the current stock price. More →

  • 13 Dec
    Worried About The Chinese Financial System? Read This

    Worried About The Chinese Financial System? Read This

    • Investors tend to shy away from complex situations because they are difficult to understand. However, complex situations are exactly where the outsized profits lie for those who are willing to dig deeper.
    • The Chinese financial system has two sides, a scary one and a strong one.
    • There is one thing China has that no other market economy has.



    Introduction

    I’ll start this discussion with the story of American Express (NYSE: AXP) and its 1963 salad oil scandal.

    Anthony “Tino” De Angelis, a former commodities broker, figured that he could trick inspectors by putting just a few feet of salad oil in his containers and make it look like the containers were full as the oil floats on top of sea water. This allowed him to borrow huge amounts against the salad oil collateral. At one point, the oil market crashed and it was impossible to cash in on the collateral as there wasn’t any. More →

  • 27 Nov
    This Is Why International Diversification Is So Important

    This Is Why International Diversification Is So Important

    • The 30% international revenue exposure the S&P 500 offers isn’t enough.
    • It’s possible to add significant returns and lower your risk when investing internationally.
    • A look at economic health and fundamentals will show where it’s best to invest now.



    Introduction

    An often overlooked part of investing and portfolio strategies are currencies.

    The easiest way to look at it is to say that it all evens out over time and that the only thing important is to be diversified. By owning the S&P 500 or companies that have global revenues, we could say that a portfolio is well diversified. More →

  • 21 Nov
    Worried About The Current Financial Environment? Here’s What You Need To Know

    Worried About The Current Financial Environment? Here’s What You Need To Know

    • Today, we’ll discuss the sustainability of developed financial systems as they are now.
    • We’ll also take a look at the much talked about Chinese slowdown.
    • I’ll finish with a take on gold and what could happen.



    Introduction

    In today’s article, I’ll discuss the financial environment we are living in.

    It’s very important to see the fundamental trends and forces surrounding what looks like a stable and strong financial system. The fundamental forces are crucial because in the long term, those forces eventually prevail and have a huge impact on all financial assets. More →

  • 20 Nov
    Chinese IPOs Are Hot – Here’s How To Profit On Them

    Chinese IPOs Are Hot – Here’s How To Profit On Them

    • Today I’ll discuss 3 recent Chinese IPOs and will give you a few investing tips through these examples.
    • One thing you have to be accustomed to is volatility, thus allocate a proper part of your portfolio to Chinese IPOs.



    Introduction

    Investing in recent IPOs in a treacherous thing to do.

    The first difficulty is that there aren’t any historical prices to study. This is somewhat of a good thing because it means we cant anchor to any past stock prices which allows us to really be what investors should be, business analysts. More →

  • 16 Nov
    These Two Chinese Retail Giants Could Deliver HUGE Returns

    These Two Chinese Retail Giants Could Deliver HUGE Returns

    • I’ve created simple models that estimate future earnings and stock price potential for two of China’s biggest retailers, JD.com and Alibaba.
    • In addition to their potential, we’ll also discuss their risks.
    • I recommend checking out yesterday’s article about the Chinese e-commerce market before jumping into today’s.



    Introduction

    Yesterday we discussed the Chinese retail environment and discussed what to look for when searching for a good investment.

    Today, I’ll dig deeper into specific investments in order to apply my theory. I’ll dig into the biggest Chinese e-commerce players, look at what the real value they offer is at current prices, and look at the risks and rewards at this point in time. More →

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