Can the Trend Continue?
As Wal-Mart (WMT) shares keep hitting record highs, Stifel Nicolaus has an analyst named David Schick who is convinced that when Walmart's earnings come out, it could put a fire under the company and keep the shares moving higher. The firm did a survey and has found out that more people are making weekly return visits to Walmart. Why would this happen? The economic environment we are in right now is perfect fuel for discount retailers like Walmart. Consumer confidence is lagging, and the pressure from this in the second half of 2012 will keep the giant performing well. While we hear authors and analysts preach about fiscal irresponsibility, the savings consumers find at Walmart will continue to attract all types of consumers. For more than half a decade, Walmart was a large stagnating stock, but this environment is bringing the retailer to life.
For the fiscal second quarter, analysts polled by Thomson Reuters expect the company to report earnings of $1.17 a share on revenues of $115.6 billion.
Oh The Irony of Walmart and the Economy!
Over the past 13 years, the chain that put Bentonville, Ark., on the map went from earning $4.4 billion on $137 billion in revenue to now clearing $16 billion on sales of $446 billion. And get this--in a bleak economy! Unemployment has since more than doubled from its New Economy-charged days of 4 percent. Gluskin Sheff Chief Economist David Rosenberg described our present state like this:
"This is looking more and more like a modern-day depression. After all, last month alone, 85,000 Americans signed on for Social Security disability checks, which exceeded the 80,000 net new jobs that were created: and a record 46 million Americans or 14.8 percent of the population (also a record) are in the Food Stamp program (participation averaged 7.9 percent from 1970 to 2000, by way of contrast). … Increasingly, the U.S. is following in the footsteps of Europe of becoming a nation of dependents."
Do you remember when Walmart was the evil mom-and-pop shop killer? How many times have you as an investor read about the cold reception county zoning people would bring to the company when it was looking to enter a community? But with the economy falling, the dead money retailer found new life. It was the best performing big-cap between 2007 and 2009, a stretch that saw the S&P 500 get cut in half. Because of the economy, it continues to enter an era of new highs.
Believing it will go up, I am putting together an income strategy for earnings that will generate profits as Walmart surpasses forecasts this quarter.
Since mid-May, it is very plain to see that Walmart had been on a very healthy bullish trend. If I look at the Bollinger Bands, I can see that the stock is using the middle band as support and this is one of the strongest bullish signals one can get in a trend like this. Since May, it has touched a number of times, but never moved down through it. The two long moves above the band would be a caution signal for me. Usually when a stock climbs in two extended moves above the middle band like that the first is greater than the second and at the end of the second the stock usually does not move much farther up. As the stock climbs like it does, another signal of a strong move with a top coming is the continued over bought pattern in the RSI as it climbs above '30.' If we combine these two together, it is a good signal of an impending top. The MACD has been consistently bearish in its daily MA pattern. But the MACD Histogram seems to starve for strength in the movement. I know the stock looks strong, but I would not be surprised to see a top soon. This top does not mean the stock will stop moving up. It might enter a consolidation phase and then continue up.
The Options Play
The stock is presently trading at $74.14. I will buy the first option in the money with a Bull Call Spread Strategy.
- Buy the September 2012 call with a strike of '72.50' (priced at $2.63)
- Sell the September 2012 call with a strike of '75.00' (priced at $1.20)
- Net Debit to Start: $1.43
- Maximum Profit: $1.07
- Maximum Risk: net debit
- Maximum Length of Trade: 6 weeks
Reasoning Behind the Trade
- Macro environmental economy is conducive for Walmart's continued growth.
- Playing into a strong bullish trend.
- Expecting Walmart to beat earnings forecast.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.