Walmart (WMT) reported fiscal Q4 results this morning that were not as bad as some might have expected in their all important holiday quarter. The company posted their best quarterly sames store sales comp of 1.8% in the last 18 quarters, likely driving the stock’s 3% gains today. Also, their relative out-performance to Target (TGT) is likely causing investors to rethink the investment thesis on WMT that trades 16.5x expected fiscal 2018 eps and pays an annual dividend just below 3%.
Before today’s pop, the stock was in a fairly well-defined downtrend, at last month’s lows down 14% from its 52 week highs made in August.
To my eye, if the stock fails to follow through tomorrow, on what is hardly a blowout volume day today, then a short trade playing for a break down below the downtrend, back possibly to support in the mid $60s may make sense. While investors are clearly enthusiastic today it’s important to note that e-commerce sales, in their first full quarter since closing their $3.3 billion Jet.com acquisition in September saw its online sales growth actually decelerate sequentially to 16% year over year growth from 21% in the prior quarter.
WMT gets 25% of their sales from outside the U.S. so dollar strength could be a headwind, while any progress on the Border Adjustment Tax proposed by Speaker Paul Ryan in an effort to get a tax plan through would be a massive headwind to WMT. Obviously we have no idea the course or pace of either but it’s worth keeping an eye on as both have likely served on an overhang on the stock which is essentially unchanged since election day, vs the SPX which is up nearly 10%.
So What’s the Trade?
WMT (71.60) Buy the March3rd/May 70 put calendar for 1.65
- sell 1 March 3rd (weekly) 70 put at .25
- buy 1 May 70 put for 1.90
Breakeven on March 3rd expiration: gains if the stock is near 70, losses if the stock goes higher from here.
Rationale – This trade starts off mildly bearish, looking for a failure of this earnings pop back to 70. The ideal sitaution is for the stock to be at or near 70 on March 3rd, at which point the short March 3rd 70 puts can be closed and rolled farther out. If the stock continues higher a 50% stop on the total risk of 1.65 makes sense.