Sovestor's  Instablog

On the business operations side, we highly applaud Walmart management to be able to grow bigger domestically in US (and generally ruined many mom-and-pop shops and small local retailers) and internationally, clearly solidifying Walmart as true global retailer. In addition, we consider Walmart is unbeatable in global retailing (and obviously, US retailing) and will likely never go bankrupt as long as they maintain or enhance their low-cost operating cost structure, supply-chain innovation and market share expansion & consolidation strategies globally.

However, we are not as bullish on Walmart as investments. All the above positive view and CNBC story on Walmart's successful business operation and improving competitive advantages (Walmart's lean-and-always-low-price-low-cost culture is certainly one huge advantage) do not mean Walmart's stock price is always a good value at anytime. As in anything else, remember the following Warren Buffett's quote: "price is what you pay, value is what you get". Let us look closely at Walmart's stock prices:

• On Oct 18, 2004, stock price was $51.99 per share VS. $50.44 per share on Oct 23, 2009 (5 years later) despite the fact that Walmart has been able to expand internationally increasing its revenues and profits as well as cash flow for the past 5 years. Note: this does not mean going forward the stock price will show similar historical performance. 
• The inflation-adjusted and US Dollar depreciation-adjusted performance of the Walmart stock for the past five years is clearly a negative (which means a loss.) 

Why has Walmart, the greatest retailer the world has ever known, only been able to generate inferior investment return (infact, a loss) for the past 5 years? Here is our attempt to explain the logic:

• Great companies do not necessarily translate to great stock performance over the short-term nor long-term; and vice versa. This is a reality investors should not ignore when they evaluate any large companies (hint: you can check Microsoft stock price for the past 5 years: $ 27.74 per share (Oct 18, 2004) vs. $27.99 per share (closing price on Oct  23, 2009, 5 years later) -- a 5 years stagnation.)
• Companies with large revenues and large presence in the US and globally generally are having harder and longer time to grow faster than companies with smaller revenue base; this is a simple mathematical fact. e.g.: to grow $50 billion in revenues to $100 billion in revenues is harder and likely much longer than to grow $500 million in revenues to $1,000 million in revenues. Hence, investors generally will prefer smaller high-growth companies to provide them higher probability to obtain market-beating investment performance return over the long-term.
• Our conclusion for large companies (above $20 billion in revenues) from investment attractiveness point of view is strongly in agreement with this timeless statement from Warren Buffett, the world's greatest investor: "The investor of today does not profit from yesterday's growth."

- Goldman Sachs is up 155 percent since March 2009. The best performer among all large investment banks.

- Goldman Sachs posted $3.4 billion in profits last quarter, four times higher than its earnings from a year ago.

- Financial advisory: $325 million profit.

- Selling stocks: $363 million profit.

- Selling bonds: $211 million profit.

- Trading and principal investments: $10 billion profit ---> THIS IS THE MONEY MACHINE SEGMENT AND THE HOLY GRAIL OF GOLDMAN SACHS INTELLECTUAL PROPERTY, LEADERSHIP AND PROFITABILITY.

QUESTION:  How could Goldman Sachs' profits be so large, so easy, so breathaking?

ANSWER:  Goldman Sachs successfully obtained $10B from TARP + $11B from Federal Reserve + $30B from FDIC + $13B from AIG and utilized these huge extra funds (read: tax payers' money) to capitalize on distressed assets pools buying assets on the cheap during market downturn obviously with tax payers' help without much interest nor pay back to the tax payers.  IS THIS ILLEGAL OR IMMORAL? THIS APPEARS TO BE A LEGALIZED FACT BUT LIKELY IMMORAL. This is the ultimate black magic ala Goldman Sachs. Alert taxpayers in the US should demand clawback to get part of the profits since Goldman Sachs obtained and utilized taxpayers' money on the cheap without direct tax payers' approval. This is a sad but true story of a truly twisted capitalism in the United States where access to capital in this case is unfairly available to people and companies who do not really need it. 

KEY INSIGHT:

• If you can legally obtain cheap source of funding and you know how to put it to good use, get it as much as possible and use it carefully to generate large profits. If you don't do it, somebody else will.
• If you are morally a decent one, once you make large sums of profits, perhaps you can and should donate back some of the profits to the society (especially if you use taxpayers' money on the cheap.)
• Capitalism is just a name; there is really no true fairness in any political and economic systems; hence, you've got to know what you are doing and adapt to obtain your true edge legally and morally correct.