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Just over one year ago, I wrote one of my first articles on Seeking Alpha titled: "Wal-Mart: A Retail Stock for the Coming Decade." I articulated that Wal-Mart (NYSE:WMT) was undervalued due to four key areas:

-Strong international growth including South Africa, Brazil, and the UK

-US annualized sales growth of 7% for Wal-Mart and 6.2% for Sam's

-EPS growth at an annual pace of 11.5%

-Strong return with 18% annual dividend growth and large repurchases

Strong 1-Year Returns

At the time of the article's publication I projected that EPS growth could easily reach 15% for the next few years if the US same-store sales decline was turned around. Wal-Mart had a trailing P/E of 12.75 at the time of publication with a share price of $53.31. For readers that followed my advice, over the course of 1-yr, WMT has returned $1.92 in dividends and $18.84 in capital appreciation, for a total gain of 38.9%. This compares to an S&P 500 gain of 7.6% ($1304.84 to $1403.89). In addition, WMT has retired a net 2.5% of their outstanding shares.

Current Valuation

Wal-Mart has performed well, with 2011 topping 2010 by 8.6% ($4.18 to $4.54) and 2012 projections for EPS growth of 4.9% ($4.88 at midpoint of guidance). The dividend was also increased by 9%. Wal-Mart is currently yielding 2.2% compared to 2.74% last year, and is currently trading for a trailing P/E of 15.6 (forward of 14.78 vs. 11.74). The largest change is in the PEG ratio which has shifted from 1.37 to 3. This is obviously a massive shift in valuation.

Key Competition

Wal-Mart has done well this year, with 4 consecutive quarters of same-store sales growth during a tough environment for retail. However, primary competitor Target (TGT) has performed better with 3.1% in same-store sales as opposed to Wal-Mart's 2.2%. In addition Target is priced at a PEG of 1.74, which I don't consider to be a great value, but their stock is definitely cheaper than Wal-Mart. I think the key concern for WMT in the US, which comprises 71.6% of their total sales, is a shift to online orders. Wal-Mart will not be replaced by online grocery sales or for simple consumer products like shampoo, soap, or paper towels; however, their furniture, home/office, school supplies, electronics, sporting goods, small appliances, and general household decorations/goods sections will continue to be assaulted by the likes of Amazon (NASDAQ:AMZN). If Best Buy (NYSE:BBY) is posting a record year thus far and trades at roughly 5x forward P/E and Staples (NASDAQ:SPLS) is struggling along with a P/E of less than 10x, what makes WMT special? Groceries? That's a disastrous business, and Wal-Mart is only using that to convince shoppers to buy their higher margin products. Don't believe me? Go ask Safeway (NYSE:SWY) or Kroger (NYSE:KR) how their margins and profits are holding up.

Going Forward

Wal-Mart is not necessarily a short candidate, but it is heavily priced in an environment that does not favor retailers. If groceries command a P/S of around .1 and yield up to 4% while strong retailers like Best Buy are trading for a P/E of around 5 while yielding over 3%, than why is Wal-Mart so out of alignment? I don't necessarily take the Amazon threat as seriously as most analysts, but if they are using this boogieman story to demolish BBY stock, than why is WMT impervious?

Recommended Trades

Frankly, I just recommend avoiding WMT. I got it right last year, but we'll have to see how this one shakes out, as always there are no guarantees. For a riskier trade, consider shorting WMT and buying TGT, or simply shorting WMT and buying the S&P 500. If the overall market shoots forward, WMT will be a laggard, whereas in a decline, the short will not be as profitable as the loss for the index, but it effectively provides a cheap cushion. Selling calls is also an option, but I don't recommend it. With a long term stalwart like Wal-Mart I much prefer to sell puts at a perceived bottom than sell calls at what I perceive as a top.

Different Thoughts?

As far as I know, I'm the first to call for a b&m demise ala Best Buy, Staples, and Gamestop (NYSE:GME) stock. It seems that the Circuit City and Blockbuster analogies play better for lazy analysts than a K-Mart analogy. And hey? Why question the biggest store of them all? I shop there too, and I really wish they would move to DC!

Feel free to share your thoughts below and I look forward to a great dialogue.

Source: Wal-Mart Stock Is Overvalued

Additional disclosure: I am short AMZN.