This morning’s December Jobs Report cemented the fact that 2014 was the year that Fed policy finally had a positive effect on Main Street, not just Wall Street. Yeah there are some things to pick on, like participation rate and the lack of wage growth, but adding American jobs at an average of 245,000 a month is a clear positive. Couple that with low gas prices things are much better for those who were out of work a few months ago and wondering how they were going to make ends meet.
Looking more closely at the numbers, it may be that the 252,00 jobs added in December, following the 353,000 jobs added in November indicates that holiday staffing needs had a very strong contribution to the gains. And that has been a boon for low end retailers like Walmart (WMT).
Earlier in my Notable Options Activity post (here) I highlighted fairly aggressive call buying yesterday in WMT:
WMT – saw opening call buying, 10,000 of the WMT March 92.50 calls are bought up to 1.31 starting when the stock was $89.43, and finishing with a buy of 4600 when stock was 89.71. Options volume ran more than 4x average daily, with calls outnumbering puts 4 to 1.
The consolidation in WMT shares for most of 2014 between $72.50 and $80 was resolved with a massive runaway breakout that has resulted in 25% gains from the October lows, placing the stock up 5.5% on the year:
The move seems a bit mental in my opinion when you consider the stock is trading at 17x this year’s expected earnings that are only supposed to grow 5% on 3% sales growth, with a fairly paltry dividend yield of 2.1%. Valuation on a P/E basis is reaching 7 year highs.
To buy shares here you either think that earnings and sales will accelerate meaningfully in 2015, or that the stock will see multiple expansion for some reason. I think it is important to note that despite buying lots of its own shares, the company has not seen double digit earnings growth since calendar 2012, and off of a $486 BILLION sales base will be very lucky to ever sniff sales growth above 5% again.
Options prices look fairly attractive though, for those looking to express directional views, and the call buyer yesterday looked to take advantage of the unusual pick up in realized volatility (white line below – how much the stock is moving) vs implied volatility (blue line – the price of options):
This is not a story I would be chasing, little room for error in my opinion. But if you just can’t help yourself, calls in vol terms look reasonable in what is likely to be a higher vol environment for the time being!