Use The 'Dogs Of The Dow' Strategy And Buy Wal-Mart

| About: Wal-Mart Stores, (WMT)


The company does well during recessions and is trading at a much lower valuation than a year ago making it a great time to buy.

The 3.2% dividend pays investors to wait for upside and helps to weather a potential bull market.

The famous strategy to buy the "dogs of the Dow" from the previous year makes a lot of sense in this case.

Wal-Mart's (NYSE:WMT) stock had a terrible year in 2015 going from $90 a share at the beginning of the year all the way down to the current price of $64, and that is after a small bounce last week. One of the reasons for the stock's decline was a disappointing earnings report and investors are worried about competition from Amazon (NASDAQ:AMZN), which has become WMT and every other retailer in the country's arch nemesis. But when you take a long-term view, WMT is a very good deal at current prices and while it may not be able to win the online war against AMZN, it will continue to dominate the low cost brick and mortar retail space.

Warren Buffett made a huge bet on the company last year and while many are pointing out the fact that the stock is down since the purchase as evidence he has lost his Midas touch, one has to remember that he takes a very long-term view of his investments. In virtually every annual report to shareholders that have now become famous, Buffett reminds investors that he looks at results over five-year time periods, much longer than the typical investor looking at yearly or quarterly results. With WMT, this approach makes a lot of sense because it dominates the nation's retail sector and is not in danger of decline simply because it had one quarter where earnings came in lower than expected by Wall Street.

The stock trades at a P/E of only 13, which is a huge discount to the average P/E of the whole stock market, which is still near 20 even after last week's scary sell off. This conservative valuation makes WMT attractive as we go into a volatile year where pundits have predicted stocks to go every which way imaginable, which means there is a great deal of uncertainty in the market generally. But there isn't much uncertainty about what will happen with WMT. The company will make a ton of money and will do even better if the economy goes into a recession because as consumers become ever more price conscious, WMT will get customers that don't normally shop at its stores while keeping current customers, which will bolster the company's performance. Even with the so-called disappointing earnings report, the company still made over $16 billion in profit in 2015. That's a lot more than AMZN made and isn't exactly a sign that the company is in decline.

The 3.2% dividend is a nice bonus to the stable underlying business model and in combination it makes for a very defensive long-term holding, especially at today's prices. We should never invest in a business just because a famous investor does because that person, in this case Mr. Buffett, may have different goals than us, and in his case, he is trying to deploy huge amounts of capital which leaves him with far fewer options than the typical investor. On the other hand, when you look at his move, it seems clear that what he sees in WMT is a conservatively financed company that is extremely unlikely to go out of business over the next several decades that also pays a decent dividend. The company trades at only 2.5 times book value and has an excellent 18% ROE, which are further positive indications of the company's conservative valuation and efficiency of operations.

So while you may not get rich quick by buying shares of WMT, you are very unlikely to lose money over the long term and can collect the nice dividend no matter what happens. Going into the scary 2016 market with so much uncertainty it makes sense to be defensive and there aren't too many places in the market more defensive than the market leader of discount consumer staples that pays such a nice dividend. And history has shown that the Dogs of the Dow tend to have large gains after a year of underperformance. If that's the case this year, then WMT's stock is set to have an outstanding 2016.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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