Wal-Mart has been on a tear for the past 18 months, rallying from $50 to $80 in that period. In relative terms, in a raging bull trend, that might not be a huge move, but considering that WMT stock didn’t move outside of the 40 to 60 range for 10 years, that was a massive move for the name.
It’s a $250 billion market cap company with sales projected to reach more than half a trillion dollars next year, by far the largest single retailer in the world. But the company known for low prices has a stock price near all-time highs. What to do with the stock here?
In my macro wrap this morning, I discussed how most consumer staples stocks were overvalued, but Wal-Mart actually stood out as a name with a reasonable valuation. It’s a 15 P/E name that has actually grown earnings between 5-15% per year in every year going back to 2005. That’s the definition of consistency, during a very volatile economic period. It pays a 2.4% dividend, and offers more of a necessity than a luxury, another factor in its consistent results.
So the fundamental backdrop is reasonable, but nothing to get excited about. I am intrigued right here for a new trade for 2 reasons:
1) Wal-Mart’s technical setup here is very appealing. The 1 year chart shows the importance of the 77.50 level as the high in 2012, that has served as support in the past 6 months:[caption id="attachment_25998" align="alignnone" width="631"] 1 year daily chart of WMT, Courtesy of Bloomberg[/caption]
Normally, I’d be wary of a potential false breakout, but since WMT is a staid, boring name, with a rising 50 day moving average fast approaching, and it’s a much better value than other defensive names, I feel more comfortable that buyers will step in to support the stock rather soon. Perhaps my favorite part about this setup is if WMT holds in this area, it only has a $2.50 wide band of resistance before it makes a new all-time high around $80, so the stock can make a new breakout without too much work.
2) Wal-mart’s implied volatility is very low, making options quite cheap, and offering an easy way to play for a move to the upside. I was looking at September options, which are priced around 14 implied volatility. Here is the 2 year chart of 3 month implied vol for Wal-Mart:[caption id="attachment_25999" align="alignnone" width="658"] 2 year chart of 90 day implied volatility in WMT, Courtesy of Bloomberg[/caption]
Clearly, implied volatility is unlikely to move much lower than where it is today. In that vein, buying Sept options is a good risk/reward proposition, no matter the directional view.
TRADE: WMT ($77.62) Bought the Sept 80 call for $1.51
-Bought 1 Sept 80 Call for $1.51
Break evens on Sept Expiration:
-Losses of up to 1.51 between 80 and 81.51, max loss of 1.51 at 80 or below
-Profits above 81.51
Trade Rationale: While WMT had poor earnings yesterday, I think that’s sufficiently priced into the shares here. I want to use the 2-day weakness as a buying opportunity. I bought Sept 80 calls because it gives me 4 months to wait for WMT to break out above 80, plenty of time to see a nice move higher in the name, particularly if it holds its 50-day ma in the near term.