New Trade $WMT: Return Policy

by Dan December 3, 2013 11:01 am • Commentary

Earlier this morning (below) I laid out some thoughts on the recent relative performance of TGT and WMT, given what appear to be similarly crappy results and guidance of late.  We’ve been wanting to leg into a short WMT / long TGT pairs trade.  Enis already put on a slightly long TGT options structure on November 22nd.  Against that, I’m looking to trade the WMT portion today.

WMT recently broke out to new all time highs above $80.  The stock’s rising 50 day moving average is around $77, and the stock’s 200 day moving average is around $76:

WMT daily, 50 day moving average in pink, 200 day moving average black, Courtesy of Bloomberg
WMT daily, 50 day moving average in pink, 200 day moving average black, Courtesy of Bloomberg

I don’t think the stock’s recent breakout is going to hold for the simple reason that the fundamental situation at WMT is deteriorating rather than improving.  With that in mind, I’m looking to play for a move back to the area of the rising moving averages in the coming weeks and months.

With the announced CEO transition expected on Feb 1st 2014, I would expect some sort of re-setting of long term expectations, sort of “kitchen-sinking” forward guidance so that the new guy can be set up for a string of successes.  That overhang could be an additional reason for some long-term holders to move out of the stock in the coming weeks.  

TRADE:  WMT ($80.93) Bought Jan14 82.5/77.5/72.5 Put Fly for 1.75

-Buy 1 Jan14 82.50 Put for 2.63

-Sell 2 Jan14 77.50 Put at .50 each of 1.00 total

-Buy 1 Jan14 72.50 Put for .12

Break-Even on Jan14 Expiration:

Profits: Between 80.75 and  74.25 make up to 3.25, with max profit of 3.25 at 77.50

Losses: Up to 1.75  between 80.75 and 82.50 and between 72.50 and 74.25, with max loss of 1.75 below 72.50 and above 82.50.

Trade Rationale:

This pairs trade is basically playing for a slight mean reversion in both WMT and TGT from near term oversold and overbought conditions. The main risks to the trade is a big move in the market that is enough to take both stocks outside their range (unlikely) or the continuation of the overbought and oversold conditions that stretch these trades outside their lines in the sand.





MorningWord 12/3/13: Would You Rather… $TGT or $WMT?


MorningWord 12/3/13:  There is going to be a lot of ink spilled in the next few weeks in the financial press as to just how healthy the U.S. consumer is at this stage of our economic recovery, given the massive amounts of stimulus over the last 5 years just to get us here.  While there were clearly some high profile beats in the quarter just ended (AAPL, NKE, CMG, HD, M, KORS & TIF) they appeared to be countered, and outnumbered, by the disappointments of WMT, TGT, DLTR, WFM, ANF, LOW, COH & even SBUX.

Make no mistake, the jury is still out on the consumer in what has been a higher rate environment since the spring, and last month’s consumer confidence miss, at 7 month lows, should not engender too much investor confidence.  But that is one number, and to be fair, not one that anyone I know of uses to trade.  The big one, the November non-farm payrolls number due Friday at 8:30am – well that one will be cause of many trades, and after last month’s surprise beat, your guess is as good as mine how this one shakes out.

Which leaves me to the “haves” and the “have nots” listed above.  For the most part, the consensus appears that the high-end among consumers is fine, while the mid to lower-end continues to be spotty.  Two stocks that have been the poster-children for the mid to low end malaise who have posted similar disappointments of late but their stock’s have had fairly divergent results are TGT & WMT.

On Nov 21st, TGT issued disappointing earnings guidance for the balance of the year and the stock is now down some 5.6% since the print, and is only up 6% on the year.

On the flip-side, WMT back on Nov 14th cut its eps forecast for the second consecutive time on the heels of their third consecutive quarterly same store sales decline.  The stock is up nearly 2.5% since that time and has actually broken out to new all time highs, and up almost 19% on the year.

For all intents and purposes, the earnings and sales estimates for the two are not materially different, either are the valuations, and given recent performance, if I were to play “would you rather?” I think I have an inclination of a potential pair.

Consensus 2014 2015 2016 2014 2015 2016
Adjusted EPS growth 0% 12% 29% 8% 9% 12%
Sales growth 5% 4% 4% 4% 6% 0%
Current Forward P/E 13.5x 14.5x

Average earnings growth is expected to be about 10% over the next 3 years for both stocks. Average sales growth is expected to be 3-4% for both stocks.  TGT currently trades at a slightly lower valuation.  Historically, however, TGT has traded at a premium valuation, mainly since it is a much smaller company with much larger long-term growth prospects (its current Canadian expansion, although rocky to start, is a case in point).  WMT is the behemoth of the retail world that has much less room to grow and recently just announced a surprise management change at the CEO level that will take effect on Feb 1st 2014, this in and of itself suggests uncertainty.

We are working on ways to play, stay tuned.