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

by: Todd Kenyon, CFA

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 (NYSE: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%


  • 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.