Just recently, I was appalled to find an ostensibly respectable commentator declaring that value stocks are “toxic.” I would consider Walmart (NYSE:WMT) a classic example of a company that provides value to shareholders. So, does this mean that Walmart stock is “toxic?”
To me, value is foundational if not fashionable; a mainstay of my overarching investing strategy irrespective of the sentiment cycles that come and go. Sure, value stocks like WMT weren’t “cool” last year, but I’m fine with that. And I expect the share price to outperform going forward as the reports of value investing’s death are, to butcher a Mark Twain quip, greatly exaggerated.
Abandon Value at Your Own Peril
Yes, I get it: value investing hasn’t been easy lately.
Just to throw some discomfiting stats at you, the Russell 1000 Growth Index outperformed the Russell 1000 Value Index by 9.8% last year after dividends were factored in. This wasn’t a fluke year either. From 2007 to 2018, the aforementioned Growth Index outpaced the Value Index during eight of those 12 years, with the growth stocks achieving more than twice the returns of the value stocks during that time span.
It’s been tough to “be like Buffett” and stick with old standbys like Kraft Heinz (NASDAQ:KHC) while relative newcomers Netflix (NASDAQ:NFLX) and Tesla (NASDAQ:TSLA) fly by, practically mocking value investors along the way. As a handful of FAANG and FAANG-related stocks relentlessly march upwards without regard for price-to-earnings ratios and other valuation metrics, Walmart stock feels like yesterday’s news and nobody’s darling.
The temptation to give up on old Wally World — and big-box retail generally, and value plays even more generally — is thus enormous. That, however, is where I feel unseasoned traders will be victimized: they haven’t been in the game long enough to know that markets are cyclical and the “momo” (momentum) trend will always, sooner or later, give way to value, fundamentals, and sanity.
The Forgotten Giant (among Traders, at Least)
Even if Walmart stock hasn’t doubled in price recently like Tesla shares did, the company remains highly competitive and fundamentally sounds amid the FAANG-propelled euphoria. In fact, I would consider Walmart a pioneer in the “brick-and-click” hybrid-retail sector in which Amazon (NASDAQ:AMZN) and Target (NYSE:TGT) are the company’s fiercest competitors.
Thus, while Walmart might not have attracted the attention of thrill-seeking traders, its share price might be coiling for a swift move to the upside. Russell Purvis, associate professor with the College of Business at Clemson University, said in an e-mail to InvestorPlace that “Walmart is a retail Goliath with over $500 billion in revenue in 2019.” And as the facts bear out, has the vision and wherewithal to compete with the oft-feared “Warehouse Wonder” we all know as Amazon:
Walmart sales in E-commerce are growing significantly in the areas of online groceries and Walmart.com. Online sales grew 41% in the last quarter of 2019 and accounted for roughly half of Walmart’s growth in the US…. For their part, Walmart continues to invest in online opportunities as their E-commerce continues to grow at a rapid pace. In addition, Walmart is expanding into same-day delivery to compete with Amazon. This is where Walmart has a distinct advantage, with 3,100 stores and delivery from 1,600 dedicated logistics centers.
The common perception is that Amazon is the “giant,” but that’s not always the case. For example, Professor Purvis referred InvestorPlace to information provided by CFRA Research analyst Garrett Nelson, indicating that Walmart’s total grocery sales “are bigger than the No. 2 through No. 25 grocery store chains put together.”
Nelson explains that Walmart is likely to continue dominating in the grocery business for the foreseeable future: “For Amazon to win would require a substantial investment, especially in refrigeration… And they don’t seem inclined to do that, because Amazon Web Services is a much higher-margin business.”
The Takeaway on Walmart Stock
I’ll just go ahead and admit what’s surely evident by now. In rooting for Walmart stock to outperform the FAANGs, I’m not-so-secretly cheerleading value as a value. In other words, if Walmart wins then we all win — or at least the rational among us win, at long last.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.