Walmart Shares: Great Fundamentals But At A Frothy Price

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Michael Lebowitz and Lance Roberts
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Walmart's (WMT) shares opened higher as its earnings report surpassed expectations. EPS and revenues beat expectations. Moreover, the company increased its sales guidance for next year by a full percent.

As its latest earnings report reminded us, Walmart is doing very well financially. Furthermore, its share price has surged, reflecting the company's health. While the price of Walmart shares should increase with its fundamentals, we must ask if the stock performance is commensurate with earnings. This is where technical analysis can look beyond fundamental analysis and play an important risk management role for shareholders.

Over the last year, Walmart shares have risen by nearly 100%. As the longer-term weekly graph below shows, Walmart's Williams R% and RSI have been overbought for the entire year. Moreover, its MACD is well above any prior level over the last ten years. As a result of the surge in its share price, WMT trades at a P/E of 45. Given its growth rate is similar to that of the S&P 500, its premium valuation should be questioned.

A week ago, we reduced the holdings of Walmart's shares in our equity models. We were decently overweight Walmart versus our S&P 500 benchmark and still are, but taking profits is prudent given its technical situation and high valuations.

Disclaimer: Our equity models hold a position in WMT.

What To Watch Today

Earnings

Economy

Market Trading Update

Yesterday, we touched on the "Risk Reward Analysis" we produce weekly in the #BullBearReport. Specifically, we noted that bonds, gold, and gold miners were oversold enough for a decent bounce; all that was needed was a catalyst. Not to be disappointed, news that Ukraine sent missiles into Russia caused a flight to safety early yesterday morning. However, as the day went on, stocks rallied back into the green ahead of Nvidia's earnings today.

The market is likely hinged on this report today. An earnings miss, a guidance warning, or a statement the market doesn't like will likely lead to a rather sharp sell-off in Technology stocks in particular and the broader market in general. Currently, the market is holding above the 20-DMA support level, but a negative outcome could send the markets lower to test the 50-DMA. For now, I think it is likely the 50-DMA will hold if there is an earnings miss, but a positive outcome could send the market back up to retest previous highs. With the market on a short-term MACD sell-signal, the upside remains somewhat limited, given the market is not starting from a deeply oversold condition.

For now, the overall trend remains bullish, and the year-end backdrop remains supportive of further gains. However, as we have repeated previously, such does not negate the probability of volatility swings between now and then. Continue to trade accordingly.

The Unweighted Nasdaq

Sentimentrader wrote an interesting piece showing the seasonal patterns between the market cap-weighted Nasdaq (QQQ) and the unweighted Nasdaq index (QQEW). The data in the table show the performance by month since 2005 of the weighted and unweighted Nasdaq index. As they highlight with red and green, QQEW tends to outperform in the last two and first two months of each year. QQQ outperforms from March through October. Moreover, the graphs below show how investors who swapped between QQQ and QQEW based on seasonal patterns would have outperformed holding the QQQ or QQEW ETF.

Per Sentimentrader:

The history for the test above is relatively short. However, the results have been consistent enough to prove compelling. One potential flaw of the "strategy" described above is that it is always 100% invested in the market. The history of Nasdaq performance makes this a high-risk, high-reward strategy. Above-average gains are possible over time, but significant losses can occur anytime the Nasdaq experiences a bear market. Note that from 1990 to 2000, the Nasdaq 100 Index gained over +2,860%. In the subsequent 2000-2002 bear market, the Nasdaq 100 Index lost a staggering -83%. Still, for long-term investors, the strategy detailed above does offer the potential for outperformance (versus simply buying and holding the Nasdaq 100 Index) over time.

For better or worse, the above strategy favors the equal-weighted NASDAQ 100 index between now and the end of February 2025.

The Long History Of Prediction Problems

Following President Trump’s re-election, the S&P 500 has seen an impressive surge, climbing past 6,000 and sparking significant optimism in the financial markets. Unsurprisingly, the rush by perma-bulls to make long-term predictions is remarkable. For example, Economist Ed Yardeni believes this upward momentum will continue and has revised his long-term forecast, projecting that the S&P 500 will reach 10,000 by 2029. His forecast reflects a mix of factors that he believes are reigniting investor confidence, including tax cuts, deregulation, and advancements in technology that could drive productivity growth.

We, nor anyone else, know what the market will do in 5 months, much less 5 years from now. History clearly shows that the most optimistic forecasts are often disappointed by economic realities; however, by taking some action within portfolios, investors can remain well-positioned to benefit from potential market gains while being prepared for unforeseen economic shocks.

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