Long Term Outlook For Wal-Mart Is Excellent
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.