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Long Term Outlook For Wal-Mart Is Excellent

26 January 2010 4 Comments

In recent years because of the recession, many new customers have been introduced to Wal-Mart Stores, Inc (NYSE:WMT).  With people short on cash, wal-mart stores nicer and with complete grocery stores attached, many people (including myself) do a great deal of shopping at Wal-Mart.

Looking forward, there are few things not to like about the business of Wal-Mart.  If we fall into a multi-year, decade long depressionary environment, I believe even more people will turn to the shelves of Wal-Mart for the basic necessities in life.  As people turn their backs on higher end retailers and higher end grocers like Whole Foods Market, Inc. (NASDAQ:WFMI).  Wal-Mart has the best distribution system with the least costs.

If the economy does actually recover and we enter into a new seasons of economic growth, well, Wal-Mart will still earn tons of profits, but it might not steal as many customers from the higher end stores as I already mentioned.  Wal-Mart will be a compelling option for many individuals either way.

Now, we have to address Wal-Mart’s stock differently than the company.  Like tons of stocks these days, Wal-Mart is at a 52 week high.  As of this writing, the current yield on the stock is 2%.  Not impressive.  It’s definitely not an ideal place to buy the stock.  If a broad market correction occurs, even though Wal-Mart is fairly recession proof, the stock will still take a hit.  That would be the good time to pick up a position of the stock.

With that said, many point out that Wal-Mart’s stock has not done anything for the last 10 years even while its profits have grown substantially.  As such, you can’t go wrong buying at current levels.  I agree with this to some extent; therefore, maybe you should buy half or a third of your desired position at current levels.

My Preferred Strategy – Sell Puts

I think selling puts on some shares of Wal-Mart is a good strategy to wait out a better purchase price.  For example, you can sell a March 2010 put with a strike price of $50 for $.31 per option right now.  Make sure you have the $5000 in cash for each contract to purchase the shares if the strike price hits.  In this scenario, you would earn a premium of $31 for every 100 shares you’re committed to buy.  It’s essentially a .62% return over two months (3.7% annualized return) while you wait for a better entry point.  The only way you lose is if the shares drop significantly below your strike price of $50.  You’re still better off buying at $50 versus north of $54 where they trade today.  Think about it and do your own homework.

4 Comments »

  • susis said:

    what's next? they will start laying off associates that work at the distribution centers, stores? i wish someone had a crystal ball!!! i work at a d.c. at there are over 2000 people employed there!

  • 20smoney said:

    Well they just announced layoffs for some Sams Club stores which have underperformed the regular stores… i think for the most part you will be fine moving forward as walmart should hold up fairly well. Good luck and I hope for the best for you!

  • Eric said:

    Wal-mart Distribution centers are a great place to work. At the DC I work at, you top out at $22.05 a hour. You make it what you want it to be. It is your wal-mart!