I did something stupid a few months ago.
I sold Wal-Mart (NYSE:WMT).
After calling it the "McDonald's of 2016" I bought some in January. But when the company announced a retreat from its plans to downsize stores I jumped off the train, taking a small gain but missing the bulk of the run-up.
Wal-Mart is currently up almost 20% for the year, at $71, mainly because the Price/Earnings multiple has jumped to almost 16. Sales for the first quarter of the year, ending in April, were up only $1.1 billion from a year earlier, at $115.9 billion. Net income actually fell slightly, from over $3.3 billion to under $3.1 billion.
But that drop was part of the plan, and ahead of expectations. CEO Doug McMillon had told shareholders not to expect big profits until 2018, as the company works to fix its e-commerce problems. The company is building new warehouses and has a large presence in Silicon Valley.
So why did I bail?
First, I didn't like the way the company was going about its e-commerce revolution. It's copying the model of Amazon.com (NASDAQ:AMZN), but it's not Amazon.Com. The trick should be to deliver from stores, not centralized warehouses. But that turns out to be really, really hard, as I learned when I ordered online from a store before a recent trip.
Wal-Mart's challenge remains breaking bulk on electronic orders, and Amazon has shown how that can be done efficiently. Doing it in stores is clumsy at best, and most customers would rather run in for what they need than have some clerk grab it for them.
Still, low-wage workers are now getting higher wages, and more can afford to shop at Wal-Mart. McMillon's controversial decision to raise pay at his stores, first to $9/hour and then to $10, was seen as controversial among investors, but it was necessary to remain competitive, and may be insufficient to that challenge. With unemployment now at 4.7% and average earnings up to $25.59 hour, people don't have to work at Wal-Mart.
In short, Wal-Mart is back to being Wal-Mart, but Wal-Mart is no longer a horrible thing to be. The Neighborhood Markets scheme, which competes with stores like Kroger (NYSE:KR), is being reworked, and the plan to build smaller 15,000 square foot units against Dollar General (NYSE:DG) has been shelved. But the superstores look cleaner, the clerks are no longer as surly, and you can usually find what you need there quickly - that wasn't always the case a few years ago.
The people shopping at the company's Sam's Club warehouses aren't as prosperous as those shopping at Costco (NASDAQ:COST), the merchandise mix is cheaper and more Wal-Mart-y, but as I learned on another recent trip there the crowds have returned. Just because it's not my cup of tea doesn't make it undrinkable.
The point is that with a giant retailer like Wal-Mart it doesn't take a complete turnaround of the ship to see a new course pointing toward better times. Adjust the wheel a few degrees in the right direction and the results can be surprising.
Disclosure: I am/we are long COST, AMZN, KR.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.