WMT: Always Low Prices?

by Dan January 7, 2016 1:19 pm • Commentary• Trade Ideas

Shares of Walmart (WMT) are up nearly 6% in 2016 after closing down nearly 30% in 2015.

Back in mid November after WMT management took a an axe to current year guidance. So much for the boon of lower gas at the pump for U.S. consumers. At the time I considered the potential for 2016 to start with a reset lower of expectations, from Nov 18th:

This is assuming the company can meet current consensus in a year where the company has guided fiscal 2017 sales to flat vs this year’s $485 million, the lowest sales growth in more than 10 years, and where it appears the ground is quickly moving below the feet of traditional bricks and mortar retailers. To be frank earnings growth is being manufactured, as the company also announced a new $20 billion share repurchase agreement, after retiring the remaining $8.6 billion from their prior program. The company might have better spent a chunk of the last last $8.6 billion on investments in e-commerce and digital initiatives which in their mid Oct investor update the company stated they will spend about $1.1 billion on in fiscal 2017.

Well, WMT management has stated fiscal 2017 (current year) will be an investment year. Ask Macy’s (M) how investing in omni-channel went last year while competing with the likes of Amazon (AMZN) and a generally weak U.S. consumer.

Taking a quick look at the technical set up, its sort of a mixed bag.  Obviously the precipitous sell off from the early 2015 highs above $90 to below $60 discounts a lot of bad news. But it’s my sense that the recent bounce provides a good short entry, targeting a break of $60 on the downside:

WMT 5 year chart from Bloomberg
WMT 5 year chart from Bloomberg

The next identifiable catalyst for WMT will be their fiscal Q4 results on Feb 18th, a day before Feb expiration.  Over the last 4 qtrs the stock has moved on average above 3.5% the day of earnings.

Short dated options prices are quite reasonable, with 30 day at the money implied volatility at 21%, not too far from the one year average of about 20%:

WMT 1yr chart of 30 day at the money implied volatility from Bloomberg
WMT 1yr chart of 30 day at the money implied volatility from Bloomberg

Given the volatility in the broad market, the upcoming earnings event, and what appear to be reasonable options prices, long premium directional trades look attractive for those with a directional bias in the near term.

So whats the trade?

*Trade Idea: WMT ($64.50) Buy to open Feb 65 put for $2.20

Break-Even on Feb expiration:

Profits: Below 62.80 like short stock

Losses: losses of up to 2.20 above 62.80 with total loss at $65 or higher

Rationale: This is something we’d look to spread on weakness, possibly even by creating a vertical put calendar with a sale in January if the market weakness continues and vol goes higher.