The knee jerk response would be to answer Wal-Mart as it just sounds safer.
What is in a name? Was it logical to buy stocks in 1999 because they had a .com at the end of their name? Why is it more logical to buy a stock just because it doesn't have a .com at the end its name today?
Unfortunately, that is what fund managers are doing today. They are selling eBay and buying Wal-Mart because Wal-Mart is considered a safe stock to own in a recession. Analysts agree as the average analyst recommedation for Wal-Mart is higher than eBay.
Should you listen to the analysts and follow the fund mangers? The same analysts that give Wal-Mart a higher rating than eBay are also projecting a higher growth rate for eBay, including this year and next. eBay sells for 13.5 times Free Cash Flow to Enterprise Value, while Wal-Mart sells at 17.3 times. That means that eBay sells at a 20% discount to Wal-Mart, even though eBay is projected to have a higher growth rate. In addition, eBay has over 4 billion in cash and no debt, while Wal-Mart has net debt of over 36 billion dollars.
That must mean that there is less uncertainty surrounding Wal-Mart's business. Not so! Wal-Mart was losing market share left and right before the economy turned south. Same store sales were barely keeping track with inflation and still are not keeping track with inflation. Does that mean the country needs to stay in a recession forever for Wal-Mart to keep gaining market share?
In addition, goods from China are becoming more expensive and Wal-Mart utilizes China as much as any other retailer. eBay's growth is slowing but that is normal as the internet matures and eBay is affected by a slower economy. eBay's business is also safe in the long run. Amazon (NASDAQ:AMZN) and Yahoo (NASDAQ:YHOO) both tried to create auction sites and failed miserably. eBay has a virtual monopoly in internet auctions. There are no serious competitors, even though people have tried. In addition, within eBay are two high growth businesses, Skype and PayPal. If a growth multiple were to be applied to those two units, the auction business is being valued at closer to 10 times free cash.
True safety is in the value of the company you buy, not in a name. In the short run the irrationality can persist, but in the long run value will always win.
eBay is on my shopping list for the next time the market is feeling depressed, while I am looking for a short entry point on Wal-Mart.