Time to Upgrade Wal-Mart! (What's 35% Among Friends?)

While scanning my daily emails from several brokerage houses this morning, I came across another example Wall Street analytical rigor. It seems Merrill's retail "analyst" decided it was time to upgrade Wal-Mart (ever heard of them?) to a BUY rating today.

Now THAT, my friends, is some Grade-A Wall Street Value-add! If by chance you have been following Wal-Mart's (WMT) stock price recently, you will see that it is at a 4-year HIGH, and that this analyst missed the 35% gain since August 2007 - but better late than never I guess, so today it's a BUY!

Let me see - is it "buy high sell low"... ? Or maybe it's "sell low, ignore higher, buy high"! That's what Merrill's crack "analyst"seems to think. If you take a peek at the chart in the back of the report, the one required now in the back of every analyst report, you can see a history of the analyst's ratings on the stock. Here is how this analyst did:

• Dec. 6 2005 - ratings upgrade from Neutral to Buy, stock price 47.62
• 18 July 2006 - rating downgrade to Neutral, stock price 43.17, stock LOST 9.3% while rated buy vs. S&P500 loss of 2.1%
• 16 March 2007 - upgrade to Buy, stock price 46.21, a GAIN of 7% while rated neutral vs. S&P500 gain of 12.1%
• 14 August 2007 - downgrade to Neutral, stock price 43.82, a LOSS of 5.2% while rated buy vs. S&P500 loss of 2.9%
• 30 August 2007 - downgrade to Sell, stock price 43.32, loss of 1.1% while rated neutral vs. S&P500 gain of 2%
• 26 Oct 2007 - Upgrade to Neutral, stock price 44.64, gain of 3% while rated sell vs. S&P500 gain of 5.3%
• April 25 2008 - upgrade to Buy, stock price 57.45, GAIN of 28.7% while rated neutral vs. S&P500 loss of 9.4%

Summary:

• While rated BUY, the stock LOST 9.3% and 5.2%
• While rated NEUTRAL, the stock gained 7%, lost 1.1%, and gained 28.7%
• While rated SELL the stock GAINED 3%.

One heck of a record! The fact that she just upgraded to BUY is making me take a closer look at my WMT holdings. I trimmed a little recently in a managed account that was overweight, but continue to hold in other accounts. I think it is nearing fair value at current levels, so I am considering trimming further.

What this points out, however, is that much of Wall Street's ratings "upgrades" and "downgrades" are nothing more that backward-looking momentum calls or shallow extrapolation of recent trends. The only value they create is for themselves, in the form of commissions generated from speculative trading activity.

Just another example of why we should avoid the noise, and simply buy good companies when they look cheap and sell them when they look expensive.

Comments

[robertseibert]

So true, makes me wonder about Costco!

[Unke AL]

It's about time that analysts started to police their own. Just what kind of training , course work, degree, etc, does it take to call yourself an "analyst". To my knowledge it doesn't take any!! You simply one day declare that you are an "analyst" and, behold, you are one. Many of these so called "analysts" are kids fresh out of college who have never made or lost a dime on wall street. Wake up America and demand some qualifications before you depend on a rubber crutch.

[Paul Price]

It's that way for almost all stocks and all analysts.
They only recommend what has already gone up.

[User 148194]

maybe she is right now! WTM raised prices on most items by 5-10% few cents per item, WTM customer don't tend to worry about it, it seems that revenues will jump very fast.

[Chungst]

I would be very careful regarding WMT. It's been a long time since I had to use inflation accounting to properly value WMT's true EBIT and cash margins. When you have price inflation that is as much as 25% in one month in the goods WMT sells, WMT clearly benefits from this due to its superior operating model -- this creates distorts in WMT's earnings and cash generating ability.

What I am stating is that the rapid price inflation is making WMT's operating results look a lot stronger than what it really is, and the CONCERN for investors is that this is not sustainable.

Remember, current accounting under US GAAP for WMT is based on constant dollars and historical costs. During periods of rapid inflation, these accounting numbers will not reflect economic reality due to the distortions caused by inflation.

[Mark]

This is great to see a summary of what seems to be the norm for these analysts. Thanks! Long term probably a good holding but sort term even their raising pricing doesn't necessarily translate to higher earnings or stock price due to increased costs.