Buffett and Soros Are Buying Retail. Why Aren't You?

It seems like consumer-related stocks can't get any love from investors these days. Except perhaps in the warm embrace of two of the world's greatest investors: Warren Buffett and George Soros. The duo reported increases in their stakes of Wal-Mart Stores (NYSE: WMT  ) this week, prompting investors to utter a collective "huh?"

In the most recent quarter, Soros' hedge fund upped its stake in the retailer by 1 million shares, giving it ownership of "just" 1.1 million shares. Small potatoes compared to Buffett-run Berkshire Hathaway's (NYSE: BRK-A  ) near-doubling of its claim -- which soared from 19.9 million shares to 37.8 million. With his newly acquired stubs, Buffett's position in the company comes to more than $2 billion. Buffett also increased his stakes in Wells Fargo (NYSE: WFC  ) and ExxonMobil, as my Foolish colleague Morgan Housel explains.

Despite the rapid run-up in the S&P 500 since its March 9 lows, Wal-Mart has been a virtual snooze. While the S&P gained more than 60%, the retailer tepidly climbed just 16% from its low of the year. In fact, about the only place this retail giant was dwarfed by competition was by rivals' stock appreciation:

  • Target (NYSE: TGT  ) -- up 94% from 52-week low.
  • Costco (Nasdaq: COST  ) -- jumped 59%.
  • BJ's Wholesale (NYSE: BJ  ) -- climbed 33%.

And that, I guess, is exactly the point. Wal-Mart is so dominant that its stock never cratered quite the way others did in the downturn. Everyone expected Wal-Mart to rock in an environment where consumers were increasingly unemployed and addled by runaway debt. Wal-Mart's ruthlessly efficient supply chain means it can beat anyone on price. It's even taken on Amazon.com (Nasdaq: AMZN  ) with its recent price-slashing for the holiday season.

If rock-bottom prices are Wal-Mart's competitive advantage, then is Buffett's purchase saying something about the overall economic climate for years to come? After all, Wal-Mart has hardly grown profit during the recession, and in its most recently reported quarter, the king of cheap put up just 3.2% year-over-year earnings growth. Sales gains have been just as abysmal. Unemployment is notched above 10%, and many economists think it will be a long time before much improves. Moreover, at a P/E ratio of 15.5, Wal-Mart doesn't scream cheap.

Buffett has always coveted such efficient businesses, enthusing in the early '80s about his purchase of Nebraska Furniture Mart, whose matriarch, Mrs. B, was willing to undercut any competitor, including her own children. In fact, Buffett has long regretted not buying shares in Wal-Mart back in the '60s and '70s.

But is now the time to buy Wal-Mart? Given the company's size and reach, how much further can its shares grow? Is another retailer a better bet? Let me know in the comment boxes below.

Fool contributor Jim Royal owns no shares in the companies mentioned here. Amazon.com, Berkshire Hathaway, and Costco Wholesale are Motley Fool Stock Advisor picks. Berkshire Hathaway, Costco Wholesale, and Wal-Mart Stores are Motley Fool Inside Value selections. The Fool owns shares of Berkshire Hathaway and Costco Wholesale, and has a disclosure policy.


Read/Post Comments (27) | Recommend This Article (38)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 18, 2009, at 12:42 PM, madmilker wrote:

    cause RETAIL makes NOTHING! when will they understand tat a country cannot survive until they makes stuff.

    a 62% drop in the manufacturing ratio since 1960....

    http://mwhodges.home.att.net/reserves_a.htm#manufacturing

    a country will not last long if all it produce is to be consumed.....

  • Report this Comment On November 18, 2009, at 1:38 PM, EugeneKrabs wrote:

    Perhaps it's more of a long, defensive play? Hedge against a potential second dip.

  • Report this Comment On November 18, 2009, at 2:11 PM, jlanganki wrote:

    Could be defensive. Could be because they're moving into India. However, I have doubts about Wal-Mart's ability to succeed in India. India is dominated by small, local stores and there is a question on whether Indians would shop at a big mega-mart anytime soon. There is also the issue that most Indians don't own cars yet, making it difficult to get to a place such as Wal-Mart. McDonald's seems to be a better bet on India. Wal-Mart might also struggle to earn big profits since they're cutting prices, while at the same time the prices of the goods they sell may start to rise if oil prices go up.

  • Report this Comment On November 18, 2009, at 2:27 PM, catoismymotor wrote:

    I stay away from retail because the profit margins are small and there is not nearly enough of a moat with most of them to make them safe enough for me.

  • Report this Comment On November 18, 2009, at 3:00 PM, catoismymotor wrote:

    With slim profit margins, no real way to create a viable moat and customer loyalty almost going down the drain with customer service standards I can't bring myself to invest in retail. On your average day I would rather fight Mike Tyson, bare knuckled, than walk into Wal-Mart. Maybe Amazon or Mercado Libre would better fit my idea of a viable company, but no brick and mortar stores for me.

  • Report this Comment On November 18, 2009, at 3:05 PM, kedo76 wrote:

    Ummm...maybe because those guys can wait until 2014 for retail to come back whereas real people kindof need to be a bit more realistic?

  • Report this Comment On November 18, 2009, at 3:33 PM, TMFPhillyDot wrote:

    Important question: Mike Tyson circa Nintendo's 1987 Mike Tyson's Punch-Out!, or present-day Mike Tyson? Just curious. -)

  • Report this Comment On November 18, 2009, at 3:47 PM, greenvillewolf wrote:

    If Wal-Mart is not doing gangbusters now with the economy in the crapper, how is it going to grow when the economy gets better?

  • Report this Comment On November 18, 2009, at 4:03 PM, Stonewashed wrote:

    Because once they've hyped it, after having bought it, they'll sell it. At least Soros will.

  • Report this Comment On November 18, 2009, at 4:12 PM, TDevils13 wrote:

    I could hardly beat King Hippo let alone Tyson.

  • Report this Comment On November 18, 2009, at 4:41 PM, catoismymotor wrote:

    TMFPhillyDot, Evander Holyfield ear eating Mike Tyson.

  • Report this Comment On November 18, 2009, at 4:45 PM, ozzfan1317 wrote:

    I think with buffet at least its a dividend growth play Walmart may not have much appreciation left but they are built to last and the dividend is here to stay.

  • Report this Comment On November 18, 2009, at 5:01 PM, Melaschasm wrote:

    3.2% year over year profit growth does not sound all that impressive, until you consider that WMT has decades of consistant profit growth. If WMT can do as well for the next 5 years, as they have done for the previous five, investors would receive 7.86% EPS growth and 15.79% dividend growth. Not bad for a stock that is considered lower risk than most.

    I personally like the Costco story a little better. The current trend towards eating at home seems to help Walmart more than Costco. However, Walmart has greater market penetration, while Costco apears to have many profitable markets where they do not have any stores.

    Retailers like Costco and Walmart can also help reduce inflation uncertainty, since they are likely to be able to adjust prices to match both high inflation and mild deflation.

  • Report this Comment On November 18, 2009, at 5:49 PM, sydisquid wrote:

    He's gone against common sentiment cause he knows something we don't know. What can that be?

  • Report this Comment On November 18, 2009, at 9:11 PM, dividendgrowth wrote:

    Buying Wal-Mart is hardly an endorsement of the retail sector, and almost the contrary.

  • Report this Comment On November 18, 2009, at 9:27 PM, streetflame wrote:

    I think Buffett is getting pretty lazy in his old age. Which is fine for an individual investor but not for a CEO.

  • Report this Comment On November 19, 2009, at 1:02 AM, Fryatt wrote:

    Recently , saw a special on Walmart, They currently have 30 + locations in China. When they asked Walmarts man in Charge of expansion there how many locations might be possible he said up to 3000. And they are not done expanding in North America yet either.

  • Report this Comment On November 19, 2009, at 8:46 AM, tomd728 wrote:

    You want to view WMT as a personal shopping experience ? You are missing the point entirely.

    Me ? I don't care what the people look like...how they behave.....what they drive.......or live in.......WMT will continue to deliver the best retail value out there dollar for dollar in their space.

    In harsh economic times like these the masses will meet regardless of how they posture to others.

    Tom

  • Report this Comment On November 20, 2009, at 7:26 AM, MoiLeRoi wrote:

    When I shop at Wal-Mart, I usually leave very irritated. And, it has a lot to do with the inconsistent service -- items not in stock (for weeks at a time), commonly-available items not offered, poor quality (produce), employees not engaged in their work, employees not having good customer-service skills, high employee turnover, poorly-trained workers. Customers shop less at Wal-Mart during good economic times. Consistency matters. Either you get it or you (Wal-Mart) will go the way of your competitors.

  • Report this Comment On November 20, 2009, at 8:32 AM, JakilaTheHun wrote:

    It's a mistake to claim that buying Wal-Mart (WMT) is a bet on retail. Wal-Mart is a safety stock. Buying it is a bet against the higher risks of the rest of the market.

  • Report this Comment On November 20, 2009, at 3:10 PM, ragie wrote:

    Walmart was a buy for me under $50 and I wondered it it was worth the wait for the dividend for my measly shares I could afford. Since I'm a new investor, with little to start with and can only buy a little bit at a time, it isn't really paying me much unless the price finally gets back to 60 or more and I sell for some profit. Walmart has growth worldwide and, yes, great prices.savings to the consumer. I personally do not like to shop there because of the crowds but do it anyway to save money. Everyone loves to not like them but we do anyway. I have heard about their high turnover rate in employees due to the 3 strikes you are out management style, plus the lower wage they pay most of their workers (non-management). If they paid employees more, then where would their profit go (and our dividends?). I think I 'd keep the stock long-term if I could get a big position, otherwise it's not worth it for the little investor like me.

  • Report this Comment On November 21, 2009, at 8:54 AM, ilovesumm wrote:

    Looking at my 30% plus gain on BNI , I would rather bet on Buffett than against him. Monish Pabri had a stat that a monkey could bet on Buffetts disclosures and handsomely beat the market.

  • Report this Comment On November 23, 2009, at 1:15 PM, flacobob wrote:

    wally world has always been a good buy under $50.its been flat at these levels for 5 years ! !

    but the dividend has more than doubled. So you could say the price appreciation is long overdue.

  • Report this Comment On November 23, 2009, at 1:17 PM, flacobob wrote:

    I switched out of Buffet's favorite bank WFC and put the money to work in STD. I feel that banking regs are going to make it harder for banks here to grow and prosper much less than their overseas counterparts.

  • Report this Comment On November 23, 2009, at 6:03 PM, mattius10 wrote:

    Buffet has stated that he now has more money than ideas. At this point, the only reasonable place to put HUGE chunks of cash into relatively stable investments with a decent return is into large cap dividend payers. So with Buffet's portfolio, defensive plays like WMT and XOM seems pretty reasonable. I'm not so sure the lesson here is "what are Buffet's specific picks", but rather what is the macro trend to pay attention to..

  • Report this Comment On November 25, 2009, at 10:14 PM, RFID wrote:

    Bill Gates also own WMT shares. Do not understand's Wal-Mart's world domination ambitious. Already, Wal-Mart is one of the top three retailers in Canada, UK and Mexico. I have been to their stores in China. If there is going to be a world retailer, Wal-Mart will be the one.

  • Report this Comment On December 15, 2009, at 10:14 AM, jaypearce wrote:

    Buffett expects a lot of inflation. He wants out of the large cash position he has held - which is devaluing and not producing any income at 0%. Walmart, you should understand, is the world's largest grocer. Grocery will do better as inflation comes around and food prices go up. Also Walmart is expanding into e-commerce and there doesn't seem to be a lot of risk to the dividend.

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