Sorry, folks, but the party's over for a certain mammoth Bentonville, Ark.-based discount retailer. Here are three good reasons to sell shares of Wal-Mart
Nosebleed territory: After years of malaise, Wal-Mart shares have recently jetted higher, hitting previously unseen highs. Last quarter, Wal-Mart produced the closest thing investors have seen to a turnaround of its protracted sluggishness here in the U.S., but its stock has jetted way too high on that one heartening quarter and easy comparisons to past years of malaise.
Wal-Mart currently trades at 14 times forward earnings; analysts expect only 9% earnings growth in the fiscal year ended January 2014. Buyer, beware. There may be discounts on Wal-Mart's shelves, but the retailer's stock isn't cheap.
It's the consumer, stupid: Life's getting tougher for retailers as it becomes more and more obvious that the economy's slow and consumers are spooked. Retail sales decreased 0.5% last month, making the third consecutive month that Americans have made it plain that they're paring down their discretionary spending.
Americans on tighter budgets could be a positive for major discounter Wal-Mart -- or not. The truth is, Wal-Mart didn't fare well during the recession because its core customers were increasingly living paycheck to paycheck. Ultimately, it was unable to draw many consumers with more financial resources into its stores. Can that change now?
Given lackluster consumer spending, rival discounters like Target
Wal-Mart also faces companies like Best Buy
With the exception of Costco, Wal-Mart trades at a higher forward multiple than the other peers named. Target's trading at 13 times forward earnings, and Best Buy's forward price-to-earnings ratio is 5, reflecting its particularly precarious situation. Costco's forward P/E is 21, but its premium price reflects a gold-standard business.
Bad signs abound: Maybe some investors have forgotten Wal-Mart's Mexican bribery controversy by now, but short-term memory will not serve them well. The Justice Department and the SEC continue to investigate the allegations that Wal-Mart approved -- and covered up -- bribes used in its Mexican expansion. The fact that this situation is unresolved adds quite a bit of uncertainty to the situation.
Meanwhile in June, Wal-Mart de Mexico SAB (NASDAQOTH: WMMVY.PK), the unit directly linked in the bribery probe, said it's scaling back its expansion plans for this year. A group of investors have sued Wal-Mart, and a significant number of shareholders voted against management at Wal-Mart's last annual meeting.
Cranky consumers, corruption allegations, and a stock that's not cheap. These add up to a great time to sell Wal-Mart shares.
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Alyce Lomax owns no shares of any of the companies mentioned. The Motley Fool owns shares of Best Buy and Costco Wholesale. Motley Fool newsletter services have recommended buying shares of Costco Wholesale and creating a bull call spread position in Wal-Mart Stores. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.
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