Wal-Mart (WMT) shares have continued their bullish run as shares reached an all time high of $76.81 today and were up 3.54% at a time when the S&P 500 was down 44 basis points on the day. This kind of increase have been typical of Wal-Mart shares as of late. Shares are up about 38% over the last year. Major competitors like Costco (COST), Dollar General (DG), and Family Dollar (FDO) are also all beating the market by at least 6% over the past year, but Wal-Mart is in the lead. The question now is if this trend will continue or if these stocks' prices are artificially high as investors look for a safe haven from European troubles and lowered growth expectations in China.
The analyst expectations of Wal-Mart are pretty mild. Out of 28 analysts who cover Wal-Mart, only ten put a Strong Buy or Buy recommendation on shares. Seventeen analysts recommend the stock as a Hold and only one puts shares at Underperform. This tells me that analysts expect flat performance over the next few years as they are much more bullish on comparable stocks. For example, out of 25 analysts who cover Dollar General, 18 rate it a Strong Buy or Buy, 7 rate it a Hold, and no analyst puts any bear recommendation on the stock. Family Dollar and Costco have slightly better recommendations than Wal-Mart, but more analysts are less certain about the futures of these stocks. From 26 analysts on Costco, 13 rate shares as a Strong Buy or Buy, but five analysts have a bearish outlook on shares.
As a mature company, Wal-Mart's anticipated earnings growth is expected to slow down going forward. The retailer is expected to grow earnings 8.38% per year over the next five years, which is significantly lower that the 13.34% industry average and the 10.17% S&P 500 average. Despite this, the company has a P/E ratio close to its industry's and the S&P 500's. Dollar General is expected to grow earnings by 18.07% per year over the next five years and even Costco has high growth expectations at 12.88% per year. Costco has a P/E ratio over 28 to compensate for this, but Dollar General's is 19.3, which puts it somewhat close Wal-Mart's 15.8 P/E ratio.
In conclusion, I believe Wal-Mart's recent bull run is more of an upward correction than an ongoing trend. I currently put a hold recommendation on the company's stock as I believe there are better value buys elsewhere, although I believe owning Wal-Mart shares is not necessarily a bad thing. I strongly recommend going long on Dollar General as shares are properly valued and the company has a lot of growth potential in both new store openings as well as same store sales. Dollar General, Wal-Mart, and companies like it are good to have in a portfolio right now as we may enter into a bear market over the next few months and these stocks tend to strongly outperform the market when things are looking bad.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DG over the next 72 hours.