Valuations, technique, and sentiment point to higher prices, as WMT finally finds a starting point.
The stock had a very ugly day on Friday. All major indices (SPY, DIA, IWM) fell well above 2% on the day as stagflation rose again. Gasoline prices above $ 5.00 per gallon and rising food prices are putting the consumer in trouble.
However, there were still a few stocks that showed sparks of green during the market massacre. One was the Walmart (WMT) previously punished and beaten.
Most investors are aware of the recent problems with Walmart and Target (TGT). Profits were drastically affected by rising fuel and labor costs along with the creation of inventories. Although the company lowered its profit expectations, in reality get up sales prospects. However, WMT shares paid the price and fell by more than 20%.
The stock, however, looks decidedly more attractive at $ 120 compared to $ 150. Here are three reasons why the worst is likely to have happened for WMT shares.
Walmart is a purchase value in the POWR ratings. It is also in the grocery and boxing industry with a strong buy score, ranking 14th out of 37. The current price / sales is at a three-year low of just 0.58. While recent gains were a disaster, the market reaction is likely to be exaggerated.
WMT is now trading well below a 20x P / E by 2023. The dividend yield is a respectable 1.84% with a payout ratio of less than 50%. This is just the kind of stock that will be a safe haven for investors and fund managers to gravitate to in this market environment. Maybe that’s why the analyst’s average price target is still $ 157 per share quite robust.
WMT shares reached extremely oversold readings after the torpedo of earnings before finding their starting point. 9-day RSI printed at least two years before strengthening. MACD also reached an extreme and then rose. Bollinger Percent B reached deeply negative territory, but is now solidly positive. In earlier times, all of these similarly aligned indicators marked significant lows in Walmart shares.
As mentioned, Walmart was one of the few stocks that actually went up on Friday. WMT shares rose 0.56% compared to a loss of nearly 3% in the S&P 500. Shares bounced back in the main support zone near $ 120. WMT initially opened lower and near the day’s lows just to turn and get closer and closer to the day’s highs.
This type of reversal pattern is often a sign that the previous trend has come to an end. Sellers may end up exhausted and buyers have taken control. It is an even more powerful signal given that it took place in an important support area.
Walmart is usually seen in a favorable light during stressful economic times. Real wages have fallen by almost 3% from a year ago due to hot inflation. Homes still have to put food on the table and diapers on babies, but now they are much more price sensitive. This favors lower priced retailers like Walmart.
WMT shares are solid defensive stocks that typically outperform bearish markets. Now that the cloud of earnings is starting to rise a bit, look for a defeated and battered Walmart that performs relatively well above the general market over the next few weeks.
POWR’s options portfolio held a bullish call position on the August $ 125 call on May 23 after the gains. We went out of business on June 6 to make a 27% overall net profit as Walmart shares stagnated near the $ 130 level. The portfolio may look to re-enter a new bullish call trade now that WMT is backing up.
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All the best!
Publisher, POWR Options Bulletin
Shares of WMT closed at $ 121.70 on Friday, up $ 0.68 (+ 0.56%). To date, WMT has fallen -15.26%, compared to a -17.67% increase in the S&P 500 benchmark index over the same period.
About the author: Tim Biggam
Tim spent 13 years as chief options strategist at Man Securities in Chicago, 4 years as chief options strategist at ThinkorSwim and 3 years as First Options market maker at Chicago. He makes regular appearances on Bloomberg TV and contributes weekly to TD Ameritrade’s “Morning Trade Live” network. His primary passion is to make the complex world of options more understandable and therefore more useful to the everyday trader. Tim is the editor of the POWR Options newsletter. Learn more about Tim’s background, along with links to his most recent articles.
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