Defensive Stocks

  • 15 Aug
    Is SAM worth its current stock price?

    Is SAM worth its current stock price?

    In the constant search for value, one of the questions that inevitably have to ask yourself as an investor includes how the stock you’re looking at is likely to behave in different economic cycles. Some stocks are highly cyclic; the energy and automotive industries are good examples of market segments that respond well in certain economic phases, but really struggle in others. One of the things that a lot of investors like to do when they think the sustainability of current economic strength could be at risk is to start looking for stocks that are less cyclic in nature. Looking for companies that should do well in any economic cycle means focusing on businesses that consumers will always need to rely on no matter what the economy is doing. These are often called defensive stocks, and they often revolve around industries like utilities, healthcare, and food, among a few others.

    Another pocket of the market that can be pretty interesting is Beverages. Since they fit into the Food category, it’s usually pretty easy to buy into the idea that Beverage companies should have a pretty stable business model, no matter what the economy’s current state may be. You can actually drill down a little further, too to mine a sub-segment, Alcoholic Beverages to tap into (pun intended) what is perhaps an ironic twist on a defensive strategy, since sales of alcoholic drinks have shown a historical tendency to remain very healthy – and even to increase somewhat – when the economy is in decline.

    The truth is that alcoholic beverage companies generally do well in bullish economic cycles, as well as in bearish ones. That is another reason that this can be an interesting segment to pay attention to; but one of the difficulties about the industry is the relatively small market presence of U.S. companies. In the case of beer, for example, 85 percent of the beer made in the United States is owned by foreign companies. How do you play the industry? One of the notable names is Boston Beer Company (SAM). You may not recognize the company name right away, because the company doesn’t fit the description of a large-cap, blue-chip stock. It’s a good bet, however that you know about their products, especially if you are a beer drinker.

    The stock is interesting, because it has been following a very strong upward trend for a little more than the past year, increasing from about $130 to its current price a little above $290 per share. That’s a 124% increase in price in a little over a year; but the stock is also down since the last week of July from a high at nearly $330 per share. That’s down about 12% in just a few weeks. The stock more recently has been showing some strength, rebounding from a short-term low at around $270 per share. Is it poised to go back up and retest its $330 highs? Maybe; the company has some interesting fundamental strengths that indicate they are very well-managed and effective at managing their business. However, there are some important value-based measurements that I think suggest the stock is actually pretty risky right now. Let’s take a look.

    Fundamental and Value Profile

    The Boston Beer Company, Inc. is a craft brewer in the United States. The Company is engaged in the business of producing and selling alcohol beverages primarily in the domestic market and in selected international markets. The Company operates through two segments: Boston Beer Company segment, and A&S Brewing Collaborative segment. The Boston Beer Company segment comprises of the Company’s Samuel Adams, Twisted Tea, Angry Orchard and Truly Spiked & Sparkling brands. The A&S Brewing Collaborative segment comprises of The Traveler Beer Company, Coney Island Brewing Company, Angel City Brewing Company and Concrete Beach Brewing Company. Both segments sell low alcohol beverages. The Company produces malt beverages and hard cider at the Company-owned breweries and under contract arrangements at other brewery locations. As of December 31, 2016, the Company sold its products to a network of approximately 350 wholesalers in the United States and to a network of distributors. SAM has a current market cap of about $2.5 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings declined almost 16%, while revenues increased a little over 3%. The picture is better in the last quarter, with earnings growth at 260% and sales growing about 43%. Growing earnings faster than sales is hard to do, and generally not sustainable in the long-term; however it is also a positive mark of management’s ability to maximize business operations. The company’s margin profile shows that Net Income as a percentage of Revenues is pretty consistent, at about 10% for the last quarter as well as the trailing twelve months.
    • Free Cash Flow: SAM’s free cash flow is modest, at $86 million.  This number also has declined from about $130 million in mid-2017. Liquidity is somewhat of a question, since the company reported only about $76 million in cash and liquid assets in the last quarter.
    • Debt to Equity: A has a debt/equity ratio of .0. They have carried no debt on their balance sheet since the beginning of 2017. That helps to minimize the concern about the company’s cash position as it relates to their ability to service liabilities; but it still begs the question of what ability the company has to expand its operations, and how it intends to do it.
    • Dividend: SAM does not pay a dividend.
    • 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 SAM is $37.99 and translates to a Price/Book ratio of 7.38 at the stock’s current price. Their historical average Price/Book ratio is 7.1, suggesting suggests the stock is currently trading at a slight premium – about 7.5% – to its intrinsic value. This view is supported by the fact the stock is also trading 15% above its historical Price/Cash Flow ratio. From a strictly value-based perspective, that means the stock could be at risk to drop to a low at around $245 at minimum. That would increase the stock’s drop from its all-time high at about $330 to more than 25%.

    Technical Profile

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


    • Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s longer-term upward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. After hitting its all-time high, the stock gapped down by more than $30 overnight to its latest low support level around $273 per share. That support is also validated by the 38.2% Fibonacci retracement line. The stock is currently showing some nice positive momentum, so there could an opportunity to see the stock keep filling that late July gap; if it does keep rallying, however, look for resistance, however to show up somewhere in the $310 to $315 price range.
    • Near-term Keys: Buying volume over the last few days that the stock has been rebounding from the $273 level is significantly lower than the volume the stock has seen in the past month, which calls into question how likely the stock is to keep pushing higher. I see that as an early sign of weakness in the stock, which I believe makes the downside risk more compelling than the upside opportunity. However, a good opportunity to work the bearish side by shorting the stock or working with put options would also not have a reasonable probability of success unless the stock breaks its support as shown by the 38.2% retracement line at $259. If a drop below that level happens, the stock could easily push straight through the 50% line, all the way to the 61.8% line at around $215 per share. It is also interesting that $215 would act as the first sign of a good value play as well, since at the point the stock would be trading at a discount of roughly 20% below its historical Price/Book ratio.

  • 07 Aug
    KR is still a screaming buy despite its recent rally

    KR is still a screaming buy despite its recent rally

    Two months ago, I wrote about The Kroger Company (KR) and predicted the stock was set to reverse its long-term downward trend in a big way. I’m generally not the type of person to pay myself on the back when something like that works out in my favor, but since the stock was below $25 then, and as of this writing is surging above $30 – that’s more than 20% in two months, if you’re keeping track – I feel pretty good about that prediction.

    The other, more important reason that it seems like a good time to revisit this stock is because in spite of this nice, big rally, the stock is still undervalued. That’s pretty remarkable considering how far the stock has already moved, but it means that there is still plenty of good opportunity to work with a stock with some really terrific fundamental strength behind it and a management team that is actively working to stay competitive with bigger companies like (AMZN), Target Stores (TGT) and Walmart (WMT). Those are also stocks that get a lot more buzz in the media but whose value proposition is significantly less compelling. I still think that if you’re looking for a way to invest in the stock market defensively using the Consumer Staples sector, KR is one of the best plays available.

    The Kroger Company (KR) is one of the most well-established, nationwide names in the grocery business, and they’ve held up well for decades even as companies like WMT and AMZN have pushed their way in and changed the competitive landscape of their industry. Not only am I willing to bet there is a Kroger-owned grocery store close to where you live, I’m also going to go out on a limb and say that you probably visit that store a handful of times every month at least. That is the kind of “stickiness” that analysts like to point to when they look for companies that will generally hold up in a troubled economy. 

    This is a company that has faced challenges from competitors large and small and manages to find its own way to not merely survive, but remain competitive and relevant. In just the last month, I’ve watched the company announce moves that should be useful to that end. Perhaps the most noteworthy just crossed newswires this morning, as the company is expanding its delivery portfolio. They already offered online order pickup and delivery from almost half of its stores nationwide via its Clicklist service, but is now adding the ability to ship home essential and non-perishable items at a lower cost using its Kroger Ship service. This is a non-subscription-based service, priced at $4.99 for two-day shipping on orders under $35, and free for orders above that minimum. It’s clearly designed to compete favorably with Amazon’s Prime Pantry service (which charges a higher delivery fee and requires an active Prime membership), and Target’s Restock service (next day delivery, free if you pay with a Target credit or debit card). The service is rolling out initially in four markets (Cincinnati, Houston, Louisville, and Nashville), with plans to expand to other markets in the next few months.

    Fundamental and Value Profile

    The Kroger Co. (Kroger) manufactures and processes food for sale in its supermarkets. The Company operates supermarkets, multi-department stores, jewelry stores and convenience stores throughout the United States. As of February 3, 2018, it had operated approximately 3,900 owned or leased supermarkets, convenience stores, fine jewelry stores, distribution warehouses and food production plants through divisions, subsidiaries or affiliates. These facilities are located throughout the United States. As of February 3, 2018, Kroger operated, either directly or through its subsidiaries, 2,782 supermarkets under a range of local banner names, of which 2,268 had pharmacies and 1,489 had fuel centers. As of February 3, 2018, the Company offered ClickList and Harris Teeter ExpressLane, personalized, order online, pick up at the store services at 1,056 of its supermarkets. P$$T, Check This Out and Heritage Farm are the three brands. Its other brands include Simple Truth and Simple Truth Organic. KR has a current market cap of $24.1 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings increased by almost 26%, while sales increased at a modest rate of about 3.5%. The story is a little different, but not in a bad way in the most recent quarter, as KR saw an earnings improvement of 16% against an improvement of almost 21% in sales. The company operates with narrow margins, as Net Income was about 2.9% of Revenues for the last twelve months. This number improved in the most recent quarter to 5.39%.
    • Free Cash Flow: KR’s free cash flow is healthy, at about $824 million. That translates to a free cash flow yield of less than 5%, but remains adequate. The company has good liquidity, with $1.7 billion in cash and liquid assets.
    • Debt to Equity: the company’s debt to equity ratio is 1.74, which is a fairly high number under most circumstances, but which is also roughly inline with the industry average.
    • Dividend: KR pays an annual dividend of $.56 per share, which translates to an annual yield of 1.85% 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 uses the stock’s Book Value, which for KR is $8.54 per share. At the stock’s current price, that translates to a Price/Book Ratio of 3.54. I usually like to see this ratio closer to 1, or even better, below that level, but higher ratios in certain industries aren’t uncommon. The Food & Staples Retailing industry’s average is 3.1, putting KR bit above its counterparts. The stock’s historical Price/Book Ratio, however is 5.06, significantly above its current level. The stock would have to rally to about $43 per share to reach par with its historical average. That provides a long-term target price near to the stock’s 2-year high point in early 2016 and serves as a nice reference for the stock’s value opportunity.

    Technical Profile

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


    • Current Price Action/Trends and Pivots: The stock appears to be breaking resistance at around $29.50, defined mostly by the trading range it held from early June until late July. Prior to that point, the stock had held in a range between $23 and $26 per share. The break above that range in early June confirmed a long-term downward trend reversal that had extended back to the beginning of 2016. The stock’s next most likely resistance level, based on previous pivots, is in the $33 to $35 price area, with support at the latest breakout level between $29.50 and $30 per share.
    • Near-term Keys: If you’re looking for a good long-term, value-oriented play, the stock remains an excellent bargain, so there is little reason not to take advantage right now. The stock is only about $1 away from its 52-week high at around $31.50, so if you’re looking for a shorter-term bullish trade using swing or trend strategies, you should probably wait until the stock breaks above that level, with a short-term target price around $35. If the stock breaks down below $30, it could see room to drop to between $26 and $27 fairly quickly, which could offer an attractive bearish setup using put options or by shorting the stock.

  • 17 Jul
    CPB could be an interesting value play

    CPB could be an interesting value play

    The Consumer Staples sector is segment of the economy that has underperformed the rest of the stock market, at least until the last few weeks. Trade tensions seem to be one of the primary factors right now that have increased uncertainty enough to prompt investors to start paying more attention to industries that fit into a more “defensive” economic profile, which means that stocks like Kroger Company (KR) and General Mills (GIS) in the Food Products industry, and CVS Health Corp (CVS) and Walgreens Boots Alliance, Inc. (WBA) have been getting a little more attention. CPB is another stock in the Food Products industry that is offering some pretty attractive opportunities right now.

    Like GIS, Campbell Soup Company’s (CPB) stock price suffered from criticism in the media about the company’s appeal to the growing Millennial target demographic, whose preferences seem to point away from traditional names to smaller, more “organic” brands. The concern is warranted, as it is incumbent on any company to make sure their products align with consumer tastes and preferences, no matter how well-established they may be. That said, there is a lot to be said for a company with the kind of name recognition and history behind it that CPB carries. Their fundamentals are quite strong, and their value proposition is more interesting now that it was just a couple of months ago. 

    Smaller and more buzz-worthy (and generally more expensive at the grocery store register) brand names right now certainly have their appeal; but one of the reasons CPB is seen as a defensive stock also comes because of their ability to make their products available at cheaper prices. If and when the economy begins to slow, more expensive, currently “sexier” products will likely be challenged to retain their sales and profits far more than better established, more affordable alternatives.

    Fundamental and Value Profile

    Campbell Soup Company (CPB) is a food company, which manufactures and markets food products. The Company’s segments include Americas Simple Meals and Beverages; Global Biscuits and Snacks, and Campbell Fresh. The Americas Simple Meals and Beverages segment includes the retail and food service channel businesses. The segment includes the products, such as Campbell’s condensed and ready-to-serve soups; Swanson broth and stocks; Prego pasta sauces; Pace Mexican sauces; Campbell’s gravies, pasta, beans and dinner sauces; Plum food and snacks; V8 juices and beverages, and Campbell’s tomato juice. The Global Biscuits and Snacks segment includes Pepperidge Farm cookies, crackers, bakery and frozen products; Arnott’s biscuits, and Kelsen cookies. The Campbell Fresh segment includes Bolthouse Farms fresh carrots, carrot ingredients, refrigerated beverages and refrigerated salad dressings; Garden Fresh Gourmet salsa, hummus, dips and tortilla chips, and the United States refrigerated soup business. CPB’s current market cap is $12.4 billion.

    Earnings and Sales Growth: Over the last twelve months, earnings and revenues have both increased, with earnings growth outpacing revenue growth (18.6% to 14.6%). Growing earnings faster than sales is difficult, and generally isn’t sustainable in the long term, but it is also a mark of management’s ability to maximize its business operations and manage costs. It should be noted that the company’s Net Income is less than 5% of Revenue, which indicates that they operate with a very narrow margin profile.

    • Free Cash Flow: CPB’s free cash flow translates to a Free Cash Flow yield of about  7.5%, which is less than I prefer, but still adequate. CPB’s total Free Cash Flow for the past year was $938 million, a number that has declined since the last quarter of 2016, when Free Cash Flow was a little over $1.15 billion.
    • Debt to Equity: CPB has a debt/equity ratio of 5.73. This number increased dramatically in the last quarter and makes CPB one of the most highly leveraged companies in the industry; the increase came as a result of the company’s acquisition of snack food maker Snyder’s-Lance in March of this year. Even with the increase, their balance sheet indicates operating profits are more than sufficient to service their debt, with adequate liquidity as well.
    • Dividend: CPB pays an annual dividend of $1.40 per year, which at its current price translates to an annual yield of about 3.39%. This is above the industry average as well as the S&P 500 average of 2.0%.
    • 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 CPB is $4.69 and translates to a Price/Book ratio of 8.78; this is generally above the level I prefer and is significantly above the industry average of 2.3. More importantly, however, the stock’s 5-year average Price/Book ratio is 10.5. A rally to par with its historical average would put the stock above $49. That offers an upside of almost 19% over the stock’s current price.

    Technical Profile

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


    • Current Price Action/Trends and Pivots: The red diagonal line traces the stock’s 2-year downward trend, from a high around $67 per share to a trend low early last month a little below $33 per share. The stock has rebounded from that point and is currently hovering in a narrow range between support around $40 and resistance in the $42.50 range. The red horizontal lines on the right side of the chart mark the stock’s Fibonacci trend retracement levels, which I expect to act as resistance against a reversal of the current downward trend. The stock would have to break two levels of resistance to reach the $49 target offered by the Price/Book analysis I outlined earlier. That isn’t unattainable, and if the stock can maintain the strong momentum it has shown since the beginning of June, it isn’t unreasonable to suggest that the stock could reach that level before the end of the year. On the downside, a drop below the stock’s current support around $40 would reconfirm the long-term downward trend, with support not expect to be seen until $34 or $35 per share.
    • Near-term Keys: A break to the $43 price range could act as a good signal to enter a bullish position on this stock, either by buying the stock outright or working with call options. If you’re working with a short-term trade, look for an exit in the $45 – $46 range; if you’re willing to work with a longer-term time frame, the $49 level marked by the 50% retracement line is a nice target. If the stock breaks down below $40, you might consider working with a bearish trade, either by shorting the stock or using put options.

  • 04 Jul
    Is TSN a good defensive investment?

    Is TSN a good defensive investment?

    When markets become volatile, it usually means that investors are becoming increasingly uncertain and nervous. Uncertainty can come from all kinds of different things – concerns about inflation, wage growth, central bank monetary policy, earnings trends, and geopolitical events. For most of the last three months, most of the uncertainty in the market has revolved around the spectre of trade war between the U.S. and its biggest trading partners. That fear is raising its ugly head once more this week as new tariffs from the U.S. against China are set to take effect on July 6. Besides those tariffs, there are also looming duties against Canada and Mexico along with the steel and aluminum tariffs against the European Union and other trade allies. At the same time the U.S. will begin imposing duties on $34 billion worth of Chinese imports on Friday, Beijing is set to respond in kind with tariffs on a range of products including soybeans, seafood and crude oil.

    When economic concerns increase, investors often start to look for investments that are defensive in nature; that is, they’ll usually start moving money into less volatile, more “secure” assets like Treasury bonds and T-bills, or into stocks that they think should be less cyclical in nature and so have less risk than other stocks. Food companies, including Packaged Foods, which is the industry that Tyson Foods, Inc. (TSN) sits in, often fits into that description. While the stock is down since the latter part of 2017 from a high at around $85 per share to its current price around $67, it has also been holding its value pretty well since the beginning of May, when trade war rumors were really beginning to heat up. Does that mean that TSN, whose sales outside of the U.S. accounted for only about 12% of their total sales in 2017, could be a good stock to hold? Let’s take a look.

    Fundamental and Value Profile

    Tyson Foods, Inc. is a food company, which is engaged in offering chicken, beef and pork, as well as prepared foods. The Company offers food products under Tyson, Jimmy Dean, Hillshire Farm, Sara Lee, Ball Park, Wright, Aidells and State Fair brands. The Company operates through four segments: Chicken, Beef, Pork and Prepared Foods. It operates a vertically integrated chicken production process, which consists of breeding stock, contract growers, feed production, processing, further-processing, marketing and transportation of chicken and related allied products, including animal and pet food ingredients. Through its subsidiary, Cobb-Vantress, Inc. (Cobb), the Company is engaged in supplying poultry breeding stock across the world. It produces a range of fresh, frozen and refrigerated food products. Its products are marketed and sold by its sales staff to grocery retailers, grocery wholesalers, meat distributors, warehouse club stores and military commissaries, among others. TSN has a current market cap of $24.4 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings and sales both increased, with earnings growing at almost 26%, while sales increased about 7.5%. Growing earnings faster than sales is difficult to do, and generally isn’t sustainable in the long-term; however it is also a good indication of a management’s ability to maximize their business operations.
    • Free Cash Flow: TSN’ Free Cash Flow is healthy, at almost $1.6 billion. That number has increased modestly over the past year, but is about 20% lower since the beginning of 2017.
    • Debt to Equity: TSN has a debt/equity ratio of .73, which is pretty conservative. Their balance sheet indicates operating profits are more than sufficient to service their debt.
    • Dividend: TSN pays an annual dividend of $1.20 per share, which at its current price translates to a dividend yield of 1.79%.
    • 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 TSN is $33.03 per share. At the stock’s current price, that translates to a Price/Book Ratio of 2.0. Ratios closer to 1 are usually preferred from a value-oriented standpoint, however higher multiples aren’t that unusual, especially in certain industries. The average for the Packages Foods industry is 1.7, while the historical average for TSN is 2.0. This implies the stock is fairly valued, without a great deal of upside. On the other hand, the stock’s P/E ratio is currently 38% below its historical average, which many investors will take as a positive valuation sign.

    Technical Profile

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


    • Current Price Action/Trends and Pivots: The diagonal red line outlines the stock’s downward trend beginning in December of last year. The stock hit this line in mid-June and reversed lower, but to this point has failed to establish a new, lower pivot low below the dashed blue line I’ve drawn to illustrate the stock’s current support level. Assuming the stock continues to hold above this level, it could begin to draw bullish momentum to push back up to its nearest resistance, which should be around $72 per share (around the yellow dashed line). TThe stock has been holding in this general range since April, when trade fears began to emerge.
    • Near-term Keys: With the stock currently holding around support at about $66, there could be an opportunity for short-term swing traders to take a bullish position using call options or by buying the stock outright if the stock starts to move higher. Look for volume on up days to increase compared to volume on down days, with the price moving above $68.50 per share. On the other hand, if the stock drops below $66, the downward trend will be reconfirmed, with the next most likely support level sitting anywhere between $57 and $60. A break below $66 could be used as a signal to short the stock or to start working put options.

  • 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 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 Jun
    KR could rebound and rise more than 25%

    KR could rebound and rise more than 25%

    We’ve watched volatility in the broad market increase significantly this year compared to last year, and some of that was a reflection of uncertainty about the economy’s health and sustainability moving forward. Those are conditions that usually give investors a reason to look for more conservative, defensive types of investments, and in the stock market, one of the sectors that usually provides that comes from the Consumer Staples arena. More →

  • 24 Nov
    These 3 Tips Will Help You Survive The Next Market Crash

    These 3 Tips Will Help You Survive The Next Market Crash

    • We’ll discuss what a good defensive stock would be for the next market crash.
    • We’ll discuss Treasury inflation protected securities (TIPS).
    • We’ll discuss how gold miners can protect your portfolio.


    Yesterday, I discussed how a stock market crash can happen anytime. However, most of the triggers that I mentioned would have had the same credibility in 2012. Therefore, getting out of the market now might not be the smartest idea.

    It’s important to remember that time in the market and dividends are the main contributors to long term wealth creation. More →

  • 17 Aug
    Are Safe Havens Really That Safe?

    Are Safe Havens Really That Safe?

    • Economic laws can’t be muted forever, and in the end always get their due, therefore it is good to look at other options to de-risk your portfolio.
    • Gold is too volatile to be considered a safe haven.
    • Diversification should be the best option to avoid losing everything in a market downturn.


    Economics is pretty straightforward. The first thing they teach you in ECON 101 is that the economy works in credit cycles. In a positive environment with low risks and low base interest rates, people borrow and spend. They buy a new car, go on trips, refurbish the kitchen and so on, which leads to economic expansion. More →