Does the stock look attractive to buy ahead of the earnings season?


Company background

Headquartered in the US, Walmart Inc. (WMT) is a multinational retail corporation, operating a chain of hypermarkets, grocery stores and discount department stores.

In fact, Walmart is the world’s largest company by revenue with its $550 billion reported for 2020. Moreover, the company is the largest employer in the world with its 2.2 million employees.  Walmart has managed to evolve from just being a traditional brick-and-mortar retailer to an omnichannel player. In other words, the company’s acquisitions of Bonobos, Moosejaw and Parcel, as well as its partnerships with Goldman Sachs and Shopify, and its delivery programs, such as Walmart+ and Express Delivery have kept on boosting the company’s revenues and improving its financial performance and market positioning. These actually help the company position itself well in the market and keep pace with the changing retail ecosystem, being able to stay competitive in relation to rivals like Amazon and Target. Walmart’s portfolio is very well diversified with all sorts of different products, such as groceries and cosmetics, electronics, home furnishings, health and wellness, apparel, entertainment products and others.


Financial performance and quarterly earnings results

Walmart has seen some decline in sales due to the coronavirus pandemic that led to an economic slowdown, which of course hit the company’s operations.

During the 4th quarter of 2020 the company incurred additional costs related to COVID-19. Yet, Walmart didn’t disappoint with its Q4 financial results and reported earnings of $1.34 per share, while the expectations were for $1.19. In fact, the company beat analysts expectations in all quarters during the pandemic times and delivered better than expected results in Q2, Q3 and Q4 of 2020, further proving its strong market presence and decent financial performance even during the economic slowdown caused by the coronavirus in the past year. By looking at the Q1 2021 financial results that have come out recently, the company delivered a bit worse than expected earnings, reporting $1.39 per share while the expectations were for $1.51. Yet, we believe this result doesn’t change the fact that the economy is expected to start going back to normal, allowing people to go back to Walmart’s physical stores in the near future and that of course is expected to further boost the company’s revenues. Overall, Walmart has got a strong presence in the e-commerce business and its channel there remained strong in all units during the first quarter of 2021. In fact, the e-commerce sales of the company have surged 69% in the US segment.

Walmart is gaining from its constant efforts to expand its diversified portfolio of products as well as e-commerce presence and performance. Moreover, the company has been focused on store remodeling, in an attempt to update them with advanced in-store as well as digital innovations. Actually, the company remodeled 145 of its stores in the fourth quarter alone.

The company has reportedly seen its e-commerce business and omni-channel increasing even more during the pandemic, due to the social distancing and the desire for shopping online among many customers. In order to stay competitive in the future against rivals such as Amazon, Walmart has been improving its e-commerce services, using buyouts, alliances, as well as improved delivery and payments systems.
Walmart’s long-term debt is kept in reasonable levels, meaning that the company’s management is taking wise decisions and not overleveraging itself. Moreover, it has kept on paying dividends and buying back shares in order to return more money to shareholders.

Overall, we believe Walmart’s market positioning is very strong and it is only a matter of time before sales increase again in the near future, driving its share price higher.

Walmart is delivering its Q2 earnings on the 17th of August and the expectations are for $1.53 per share. Based on the company’s solid market positioning and financial performance, we are quite positive about the upcoming 2nd quarter earnings results and believe Walmart could beat that figure. In case it reports better than expected, we would expect to see more buying pressure on WMT stock and would be looking to take advantage of that in order to maximize our profits to the upside.


Technical analysis

By looking at the share price, we should say WMT stock has been a big winner between March and December 2020. In fact, the stock bounced from the lows at $102 in March to reach the $152 highs on the 2nd of December (49% rise). In the past few months until early March we have seen the price in a corrective mode, sending its shares down to the major support at $126 where lots of buying pressure took place right away and the price failed to break that level to the downside, leading to a massive bullish reaction straight away that has already sent the price towards the current levels at $140. Yet, the technical indicators such as RSI, Stochastics and Bollinger bands have gone close to the overbought territory and are giving some indications for a potential correction before another strong bullish reaction takes place. We at Dow Experts always include both fundamental and technical analysis in our approach in order to maximize our followers’ profitability on the different assets we analyze.

Thus, we would like to own the stock but prefer to wait for a short-term profit-taking correction that could send the price down towards the first strong support at $135 before we start buying the stock. In fact, the 50-day moving average stands at $137, matching with the strong support at that level and giving further bullish signals. In case of a further drop in the short-term we would expect to see more bullish interest at around the next key support at $126, which is the level that brought lots of buying pressure in early March, leading to a bullish reversal afterwards. As a matter of fact, the lower Bollinger band matches perfectly with the second strong support at $126 and giving us even more reasons to believe the price would bounce from one of those two major support levels.


Chart: WMT



As you know, we at Dow Experts enjoy analyzing different trading and investment opportunities. In fact, we always include the importance of both fundamental and technical factors that have an impact on the different price movements on a daily basis. Moreover, before we decide to take an action and buy a particular stock we are analyzing, we evaluate the performance of the biggest ETFs out there that invest in the stock and it plays an important role in their portfolios. In other words, we use our cross- sector correlation analysis in order to find out whether there is a similarity between the price-action of the current stock we are analyzing and the certain ETFs that own the stock. Only in case the recent performance of the ETFs confirms our bullish stance on WMT we would then be interested in adding the stock to our portfolio.

The Consumer Staples Select Sector SPDR Fund (XLP) tracks a market-cap-weighted index of consumer non-discretionary (staples) stocks drawn from the S&P 500. The XLP represents the performance of the biggest players within the sector, such as Procter & Gamble, Coca-Cola, PepsiCo, Walmart and others. Moreover, the leading ETF has got $11 billion in assets under management and an average daily trading volume of $856 million, making it a very attractive investment opportunity that gives an exposure to one of the biggest sectors within the US economy that has actually been very attractive for investors and traders over the years. In fact, the reason for the sector being so attractive is because of the essence of the products the companies within that sector offer – non-discretionary. In other words, the sector is concentrated on selling products of utmost necessity and needed for a customer’s daily life. Therefore, those stocks tend to perform well even during bad times on the market, giving investors more security and bringing lower risk on their investments.

Walmart plays an important role within the XLP with its 9% weight within the ETF.


Technical analysis

The daily chart of the XLP, we could see that after the massive uptrend since last year when the market bottomed out in the 2nd part of March, the price has now been trading in a range between $68 and $71 in the past 3 months since April. In other words, the $68 has been the strong support mark where lots of buying pressure has been taking place, while traders have been taking profits at the resistance around $71 and the price has been struggling to break that level to the upside. In fact, the price is now trading right in the middle of the channel and attempting to break the $70 mark. The technical indicators, such as RSI and Stochastics have remained bullish and pointing higher, giving further buying indications. Moreover, the lower Bollinger band is standing right above the support at $68 and further confirming the bullish stance and the very likely continuation of that strong uptrend.

We are expecting to see buying pressure at around the current levels at $70, followed by the key support mark at $68. Thus, the price is likely to bounce from one of these levels and follow the strong uptrend at least in the short to middle term.
The main reason for that is the upcoming earnings season in the middle of July. In case of strong earnings results and better than expected reports, we would expect to see the XLP bounce further in the next few weeks and that would give a chance for traders to make high profits to the upside. Based on the strong financial results we have seen in the past few quarters even during the pandemic times, we remain positive for this Q2 of 2021 as well.

Overall, the recent performance of the XLP further confirms our bullish stance on the WMT stock.

Chart: XLP


In order to further confirm our bullish expectations for Walmart, we have decided to analyze the recent performance of the other leading ETF that owns the stock – the SPY.

The SPDR S&P 500 ETF (SPY) tracks a market-cap-weighted index of US large and mid-cap stocks and is the best recognized and oldest ETF, typically topping rankings for largest assets under management (AUM). Actually, the SPY has got $350 billion in assets under management. The SPY is also the ETF with the greatest average daily trading volume with its $30 billion. Moreover, the SPY is very well diversified thanks to its investments in different sectors on the market. Its current biggest holdings are Microsoft Corp., Apple Inc., Amazon.com, Facebook Inc., Alphabet (Google), Berkshire Hathaway Inc., JPMorgan Chase Inc., & Visa Inc.



Technical analysis

The daily chart of the SPY looks quite similar to the XLP. Yet, what’s important is that after the massive uptrend to the upside and the channel trading in the past 3 months since April, the SPY has recently managed to break the $420 resistance to the upside and is now giving strong bullish indications to follow up on ahead of the upcoming earnings results in the next few weeks. In other words, there was lots of buying pressure at the upper line of the channel at $420 in the last week of June and traders finally managed to break that resistance to the upside after a few unsuccessful attempts in the past couple of months. The price has become strongly bullish again and has already managed to reach the current levels at $433 and heading higher. Let’s not forget that the SPY is the biggest ETF out there following the performance of the largest 500 companies in the US. Thus, its performance represents the overall performance on the market quite well and is a good source of indication as to where the market is headed next.

We would expect to see lots of further buying pressure ahead during the earnings season as well. Should the price test the strong support (broken resistance) at $420 then traders would be very motivated to buy again at that level and we would be expecting to see another strong bullish reversal afterwards. Overall, the recent price action of the SPY has further confirmed our bullish stance on the WMT stock and is giving us more buying indications.


Chart: SPY



Conclusion

After analyzing the financial performance of Walmart Inc. (WMT), we have further confirmed the strong presence of the company in the sector it operates and we believe the largest revenue maker in the world is expected to benefit further from its e-commerce sales and of course by the increase of customers’ purchasing activity in their physical stores once the situation with the economy now going back to normal levels. Even during the economic slowdown caused by the coronavirus in the past year, Walmart has managed to deliver some decent results and hasn’t really disappointed its investors, proving that it could remain strong even during such an economic turmoil.

We have decided to wait for a bit of a profit-taking correction that could send WMT stock closer to the strong support at $135 where lots of buying pressure is expected. We would be looking to start buying at around $137, right above the support just to make sure we don’t miss the movement to the upside afterwards. Should the price fall further in the short-term, we would be looking to buy more at around $133, right above the next strong support at $131 where more buying pressure is likely to take place. Our initial profit-taking target is set at $144-$145, right below the $146 resistance, followed by the next target at $156-$160 where we would be fully cashing in our profits and waiting for another profit-taking correction that could give us a chance to own that great stock again in the future.



Sincerely,

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