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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 (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 (AMZN). If Best Buy (BBY) is posting a record year thus far and trades at roughly 5x forward P/E and Staples (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 (SWY) or Kroger (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 (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.