A Wal-Mart Earnings Miss Is Likely to Entice Short Sellers

The doom and gloom crowd has had a hard time cracking shares of Wal-Mart Stores (WMT) this year despite unprecedented economic and market turmoil. Unbelievably, the stock is up over 27 percent in the past 12 months including an impressive 15.5% rise year-to-date. Compare that to a 28% drop in Target Corp. (TGT) shares in 2008 and you’ll begin to see why shareholders have been rejoicing.

I suggest you hold your applause until after the earnings release in tomorrow’s pre-market. The company is slated to report its Q3 results ahead of the opening bell on Thursday, November 13^th. Analysts polled by Thomson Financial expect the mega-retailer to post a profit of $0.76 per share on revenue of $98.41 billion.

In looking back at the last five quarters, WMT shares have demonstrated a rather lethargic reaction to its recent tendency to beat quarterly expectations and guide in-line. The most recent quarter in which guidance was below expectations goes back all the way to August 2007. Yes, this is before the credit storm hit our global shores and while investors languished on the beaches of equity exposure without so much as a passing thought of the risk of overexposure. Attention Wal-Mart shoppers, shares on sale in 'isle' 4!

As you can see by WMT’s earnings history, guidance is key to how investors price in results. With shares currently priced for perfection, a sharp shift in sentiment could emerge should guidance show even the slightest weakness. The short crowd is drooling here with short interest increasing over 8% in the last 30 days.

On August 14, 2008, WMT slipped 0.4% in pre-market trade after beating expectations and setting guidance in line with estimates. It turned just slightly into the green in the following regular session, ending up 0.3%.

On May 13, 2008, WMT declined 1.2% in pre-market trade despite beating Q1 expectations and setting guidance in line for its Q2. It headed further south in that day's regular session, losing 2.3% by the closing bell.

On February 19, 2008, WMT gained 1.3% in pre-bell action after topping earnings expectations and setting in-line guidance. It saw much of that early gain evaporate in the regular session, ending the day up a mere 0.4%.

On November 13, 2007, WMT advanced 3.6% in pre-market trade after topping Q3 estimates and setting Q4 guidance in line and FY EPS above forecasts. The stock continued heading higher into the Nov. 13 regular session, ending the day up 6.1%.

On August 14, 2007, WMT declined 4.3% in pre-bell action after it missed Q2 expectations and offered EPS guidance below the Street view. It continued heading south in that day's regular session, closing bell-to-bell trade off 5%.

Times have changed and one might reasonably argue that the near future for all retailers is less than chipper. Is Wal-Mart too big to fail? Of course, and so is Circuit City (CC).

Disclosure: no positions

Comments

[H.J. Huneycutt:]

What do you mean "is Wal-Mart too big to fail?" Are you suggesting that Wal-Mart is going to go bankrupt? And how do you jump from Wal-Mart missing earnings expectations to Wal-Mart being on the brink of bankruptcy?

Wal-Mart may be a little bit overvalued; that's certainly arguable, but I'm baffled by the comparison to Circuit City.

2008 Nov 12 09:44 AM

[Midnight Tr...:]

I'm certainly not saying WMT is going to or even likely to go bankrupt. The message here is that there are no sacred cows in this market and in this economy. Stock prices can fall dramatically without the underlying business going out of business.

Too many investors have forgotten or simply ignore risk because its "too big to fail" or "too big for the stock price to fall". I urge investors to rethink risk.



On Nov 12 09:44 AM Jake Huneycutt wrote:

> What do you mean "is Wal-Mart too big to fail?" Are you suggesting
> that Wal-Mart is going to go bankrupt? And how do you jump from
> Wal-Mart missing earnings expectations to Wal-Mart being on the brink
> of bankruptcy?
>
> Wal-Mart may be a little bit overvalued; that's certainly arguable,
> but I'm baffled by the comparison to Circuit City.

2008 Nov 12 10:09 AM

[H.J. Huneycutt:]

I'm not exactly sure where you are hearing masses of people suggesting that a company is "too big for its stock price to go down" --- especially right now. It sounds as if you are arguing against a ridiculous straw man.

There's definitely a case to be made that Wal-Mart's stock is overvalued, but I don't get the point in this article. We're in the midst of one of the worst stock market crashes in history and nearly the entire market has gone down --- who on Earth is arguing that there are companies "too big" for stock market price declines?

The only reason Wal-Mart has been semi-immune thus far has less to do with "being big" and everything to do with being in an industry that happens to benefit from a recessionary environment --- groceries.

2008 Nov 12 01:44 PM

[Midnight Tr...:]

As you can see from the price action in WMT since the article was posted on 11/12, shares have fallen as predicted.


On Nov 12 01:44 PM Jake Huneycutt wrote:

> I'm not exactly sure where you are hearing masses of people suggesting
> that a company is "too big for its stock price to go down" --- especially
> right now. It sounds as if you are arguing against a ridiculous
> straw man.
>
> There's definitely a case to be made that Wal-Mart's stock is overvalued,
> but I don't get the point in this article. We're in the midst of
> one of the worst stock market crashes in history and nearly the entire
> market has gone down --- who on Earth is arguing that there are companies
> "too big" for stock market price declines?
>
> The only reason Wal-Mart has been semi-immune thus far has less to
> do with "being big" and everything to do with being in an industry
> that happens to benefit from a recessionary environment --- groceries.

2008 Nov 19 04:56 PM