Walmart Alarm Bells Send Message About Historically Extreme Valuations
Why Walmart’s forward guidance and valuation levels should be taken as a cautionary tale.
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Equities dropped across the board in trading on Thursday, led by the 450-point fall in the Dow.
The small-cap Russell 2000 also lost nearly 1% on the day. Both the S&P 500 and NASDAQ staged solid rebounds off their lowest levels of the day to end the trading session down less than half of 1%.
Given all the economic and political uncertainty in the market right now, stocks are holding up quite well in my opinion. There are so many significant questions that investors don’t have solid answers to at the moment. How far will the tariff war escalate? What impacts will new tariffs have on inflation? The global supply chain? Will they result in new trade deals?
The southern border has been effectively shut in the new administration’s first month in office. In addition, tens of thousands of federal employees, if not more, are on their way to being pink slipped. How big of an effect on the overall jobs market will both developments have in the months ahead?
Then there are what appears to be the beginning of real peace talks around ending the three-year conflict in Ukraine. If that plays out, what will happen to defense stocks? Palantir Technologies Inc. PLTR plunged in early trading on Thursday just on the possibility of potential cuts to the budget of the Department of Defense.
Then we have another potential government shut down on the horizon if a new budget cannot be passed in the coming couple of months. With the majority party having a slim majority in the senate and next to no margin in the house, a possible disruption seems more than a low probability event.
My view continues to be that many well-known stocks are not priced correctly, given the current level of uncertainty. One can look to Walmart WMT in trading on Thursday as but one example of how this could play out in the months ahead. The retailing behemoth beat both top- and bottom-line expectations with its Q4 numbers and boosted its quarterly dividend by 13%. However, the stock fell 6.5% on the day due to management’s tepid guidance for the new fiscal year. Leadership cited potential tariff impacts and an uncertain consumer environment as some of the reasons for their conservative outlook.
What made the stock vulnerable to its significant move down Thursday was its valuation levels. Even after Thursday's fall, the shares are priced at over 35-times forward EPS. That seems beyond rich for a company growing earnings at 10% annually on sales growth of 4% to 5% with a 1% dividend yield. Based on historical valuation metrics like to price to sales ratio or PE, WMT has rarely been awarded higher valuations.
Many other mega-caps, like Apple AAPL, have similar growth profiles, face some of the same uncertainties and are also trading at historically-extreme valuation measures. Will these names continue to defy gravity given the numerous uncertainties in the market or will investors need to significantly temper their expectations going forward?
I guess we will all find out together in the quarters ahead.
At the time of publication, Jensen had no positions in any securities mentioned.
