When a stock trades opposite the market with decent relative strength despite resistance, the odds are good a breakout is coming.


WMT - Walmart - Company Profile

Walmart has been in a downtrend since trading at a high of $91 in January 2015. Same store sales were declining, stores were not being maintained, shelves were not stocked and investors fled the shares. Something happened in November 2015.

Q3 profits came in higher than expected and the company provided upbeat guidance. That was a huge change in direction for the company.

The CEO pointed out that Walmart has $485 billion in sales but only $15 billion is online. They hired about 2,000 people to work on improving the online business and competing with Amazon. At the same time Amazon announced it was going to open some retail brick and mortar locations. That suggests that you cannot do everything online. With revenue of $115 billion, Amazon is going to spend billions opening 300-400 retail locations. Walmart already has 11,500 locations. It is a lot easier to manage adding an online shopping website than open hundreds of locations.

Walmart has figured out that they need to have a big online presence and they are moving in that direction. They already have the backend distribution and warehouse network so the task ahead is a lot easier. They have plenty of cash to throw at the effort and they will get it done.

Walmart announced a wage hike for all their employees and improved benefits. The hikes will cost more than $1 billion a year. The stock was hammered on the news until analysts did the math. With $485 billion in revenue, they can raise the price of everything by only 0.22% or roughly 22 cents per $100 in sales and the entire wage hike is paid for and you still have the lowest prices. When you have that kind of scale, the numbers are mind boggling.

Walmart sales are improving as management got control of the internal problems. They hired more people and shelves are now stocked. Walmart is also adding significant numbers of organic products from produce to their private brands. They are significantly cheaper than Whole Foods and Fresh Market.

They recently announced a restructuring program to close 154 stores. The vast majority are the smaller Walmart Express stores and the smaller Neighborhood Market stores. Those never did well for Walmart. When customers shopped there, they were frustrated by the lack of all the merchandise in a Supercenter.

At the same time they are adding Walmart gas stations to their stores. Previously some stores had stations operated by Murphy USA (MUSA). The company announced last week they were adding their own branded stations in order to create another revenue stream. This is a good idea since having cheap gasoline is yet another draw to get people to shop at Walmart. Gas stations and their attached convenience stores are very high profit businesses. Those fountain drinks, jerky, candy and chips are very high profit items.

Walmart has its own credit cards. If they can hook consumers into paying at the pump with those cards then they win again from the interest collected.

Walmart is turning itself around and the low gasoline prices are putting extra money in consumer pockets. Walmart is doing its best to get those consumers to spend it in their stores.

Shares rebounded from a four-year low at $56 and have been accelerating higher. The high last week at just over $67 was a six-month high. At $67 Walmart only has a PE of 14. That is less than Target at 16 and Costco at 28. Walmart paid total dividends of $1.96 in 2015 and it has increased its dividend annually since 1974. They recently announced a $20 billion share buyback program over the next three years starting in 2016. That is almost 10% of its stock at today's prices.

I am recommending the Jan $70 LEAP call, currently $3.85. In order to prevent being stopped out in market volatility I am recommending we add the March $62.50 put at $1.09 and not have a stop loss until Walmart shares are significantly higher and we can remain profitable. I am only adding the put position if WMT shares dip to $64.50. If Walmart shares move higher as expected the $1 spent for the put will be easily recovered.

With a WMT trade at $67.65

Buy Jan $70 LEAP Call, currently $3.85, no stop loss

With a WMT trade at $64.50

Buy Mar $62.50 Put, currently $1.09, no stop loss.