One of the most commonly used arguments for why a stock won't go anywhere is past price performance -- specifically, that a company's stock has stayed flat or gone down over some preceding period of time. Critics have frequently employed that argument to describe Wal-Mart (NYSE: WMT ) , which has actually fallen since its all-time high in 2000.
Wal-Mart was hardly the only company caught up in a bidding frenzy in 2000. During the frothy dot-com bubble, companies such as Intel (Nasdaq: INTC ) , Cisco (Nasdaq: CSCO ) , and Dell (Nasdaq: DELL ) also reached astronomical valuations. All came crashing down from those heights, and each has yet to recover.
One of the first reasons I hear about Wal-Mart's unsuitability for investors' portfolios is that the stock price has gone nowhere over the last decade. Because of this, the stock must be a bad investment today. Before we draw such a conclusion, let's look at the company's results over the last decade:
Fiscal Year 2000
Fiscal Year 2010
|Sales (in millions)||$166,809||$408,085||144.6%|
|Market Cap (end of fiscal year)||$253,688||$199,721||(21.3%)|
Source: Capital IQ, a division of Standard & Poor's. All dollar amounts in millions.
The first thing that pops out is how fantastically expensive Wal-Mart was in 2000. The company ended the 2000 fiscal year trading at mind-boggling 47 times earnings. That's a rather high multiple to pay for a discount retailer, let alone one that had already achieved more than $166 billion in annual sales.
Fast forward to 2010, and we see a different picture. Not surprisingly, the company's market cap dropped like a rock. However, there's a bigger story here: A glance at the numbers actually shows that the company performed quite well. From 2000 to 2010, Wal-Mart more than doubled its already high sales numbers, while increasing net income even faster. Many haters would be surprised to see that the company's numbers were actually quite strong.
It's clear that those who badmouth Wal-Mart based on stock performance alone are not presenting the full picture. The company has continued to improve virtually every financial metric over the last 10 years. Unfortunately, investors' excessively high expectations still doomed the stock to failure.
All told, it took 10 years of falling share price and improving earnings for the stock to finally trade at a reasonable valuation. In fact, Wal-Mart currently trades at 13.2 times forward earnings, much lower than it did a decade ago.
Foolish bottom line
The next time an investor points to a stagnating stock price as a reason for avoiding a stock, don't be swayed. You should examine a company's earnings power and its growth over time before making any claims that a company's unsuitable for investment. A falling stock price may signal dwindling earnings. But it could also reveal an extremely high past stock price that's reverting back to a more realistic level.
If Wal-Mart can continue to increase its numbers as it has in the past, the stock price should reverse its decline and move meaningfully higher. Whether that'll happen, however, remains anyone's guess.