Ever since Walmart has been turning around its imagine with consumers, it has been suffering on Wall Street. I hate to frame commentary on stocks in such a way, but its approaching a territory where it becomes more attractive to Warren Buffett. There's plenty of speculation based on people's own personal predilections about the elephant Buffett is about to take down. I'd like to think that my musings assume more prescient form, because as I always do, I'm going to refer you to the excellent description of exactly how Warren Buffett invests. The key takeaway in this instance is that ~14x earnings is the sweet spot for a lot of big cap value stocks that Buffett invests in. He also mentioned on CNBC that he has been buying more, and as far as valuation goes, Walmart keeps getting cheaper.
Walmart now trades at 12.5x earnings. Buffett has said in the past that his biggest mistakes were ones of omission as opposed to commission. One of the biggest? Not buying more of Walmart in the mid 90s. He has stated he believes it cost $10bn in shareholder value, because the price moved up a little after he started to buy and so he backed off. I don't think it takes any conjuring of Buffett or pondering his rationale to understand what would make Walmart an attractive investment.
A lot of people get bearish on the stock by taking a short term perspective and not looking at the business. The company has some warts with the potential class actions lawsuit from female workers, perpetual demonization by unions, potential increases in prices of Chinese manufactures, and stalling US growth. Even the last point, while potentially a stumbling block, has the miasma of poorly thought out short term market views. None of these really have an effect on the long term prospects of the stock.
Rising prices from its Chinese based manufacturers? Is that really the best you could come up with? Walmart's low cost advantage is not who it gets its products from (Walmart gets its products from Hu. Who? Hu. Walmart gets its products from Hu. No, I asked you Walmart gets its products from Hu....readers, I'm sorry you must tolerate my occasional daliances with unhumor). The advantage is in how. Wherever and from whomever it may import products from doesn't negate the advantages of its world class logistics and economies of scale. Will this maybe cause some short term ripples in the supply chain? Sure, just like its always been a huge issue for the company (sarcasm). Is the long term health of the company at risk? No. Walmart will retain its value proposition whether prices are X, 2X, 3X+5, or ∞+1.
Look at the year-over-year growth of the company. Nothing gets more consistent than that. Every year the company reports higher sales and profits. This isn't the financial manipulation that General Electric used to commit through its GE Finance arm. This isn't some deriviatives induced phantom profit like Enron. It earns great returns on capital. It increases its dividend every year and buys back its stock. This is all in spite of stumbling in Germany, Korea and smaller store footprints in the US, a tough economy, and public image issues. This company is totally shareholder oriented, a low-cost operator, and has plenty of years of profitable and consistent growth ahead of it. When I first began investing, it was always about low PEs, dividend yields, buybacks, and growth when it came to an explanation of what makes a good stock to buy. Walmart is a simple company that checks off on just about every point on a checklist of stocks worth buying.
I look at the price its at right now, and Mr. Market is not in a depressive state, he's in a hallucinogenic state. It doesn't take a genius to understand Walmart (see above for proof). There is upside and a margin of safety, but not as much as one can find in smaller stocks if they put in the effort. For all my lovely readers running billions of dollars (real or otherwise), it's worth pointing out that a company liquid enough to move the dial in a large portfolio is trading at a price as cheap as it has been in the past decade based on earnings. I thought the blogosphere deserved a quasi-factually backed pick of a company that Warren Buffett might buy as opposed to the headline grabbing junk being printed (I feel like if I criticized a specific pick, I would end up eating my words, but many of the companies being touted don't really fit the typical Berkshire bill). It helps that he has already bought shares of the company. Not that I have any specific insight, but it wouldn't shock me to see him buying more at these levels.
Disclosure: None.
Although my writing is somewhat convincing, I'd rather have the capital free to take advantage of opportunities in smaller companies. I thought it was still worth pointing out though because the company issued guidance in line with analyst estimates and has fallen ~10% in the past month or so. Not exactly distressed, but noteworthy nevertheless.
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