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September 13, 2012 8:37 pm
As indicators of financial anxiety go, a wild rush into Walmart shares is right up there with bulk purchases of guns and canned food. And a wild rush is just what we’ve had: since mid-May, Walmart shares are up by a quarter, adding $50bn to the retailer’s market value (Smith and Wesson shares are up by a full half over the period; Campbell’s shares have not caught the fever yet). The unprecedented rally leaves the stock right up against its all-time high.
The wider market has also risen over the same period, not normally an indicator of investor worry. These are not normal times, however: central bank suppression of interest rates forces all but the most bearish investors to own equities. Until policy makers take the pressure off, investors will try to have both income and safety by owning Walmart. It has a yield of almost 2 per cent and performed beautifully during the last crisis, providing positive returns while the market lost half of its value between 2007 and 2009.
This is not a pure flight to safety. Same-store sales growth at US Walmarts (which represent 60 per cent of the company’s total revenue) was negative from mid-2009 to mid-2011, but went positive late last year, and accelerated for three straight quarters. In the most recent quarter, though, the growth slowed a bit, to a little more than 2 per cent, and total sales dropped sharply.
So Walmart is a slow grower (and its margins are not expanding much, either). Is it cheap? At 15 times forward earnings, not any more. Does it have room to run from here? Given the move to date, probably not much. Is it to be preferred to holding cash, the value of which will be slowly eroded by inflation? Absolutely, unless, against all odds, the economic outlook brightens considerably. In that case, Walmart investors may wish they had stuck with bullets and soup.
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