Just because a retailer sells stuff at bargain prices, that doesn't mean the retailer's stock is a bargain itself.

As I do every week in this column, I try to find stocks that aren't cheap. This isn't simply a matter of applying price-to-earnings multiples or industry-based price-to-sales ratios into the valuation. I also have to consider what a particular company's future earnings power will be.

I'm a generous critic. I rip into a stock, but I come right back with three more that I think will be better portfolio replacements.

Who gets tossed out this week? Come on down, Wal-Mart (NYSE: WMT).

Flash in the pan
When I began this column two years ago, I figured Wal-Mart would probably never make it into my trash bin. The chain that Sam Walton built is the world's largest retailer. It's hard to compete with Wal-Mart's scale and its mastery of inventory turns to keep shoppers happy through meager markups.

However, there have been a few cracks in Wal-Mart's all-weather coating lately.  

The first sign was last month's announcement of store closures and layoffs at its Sam's Club chain. Warehouse clubs should be the recession-proof poster children, since they provide deep bargains on bulk wares -- but something wasn't quite right at Sam's Club.

The more ominous sign came earlier this month, when its namesake stores clocked in slow. Stateside comps fell a surprising 1.6% during the holiday quarter, and revenue grew by less than 5%.

Earnings grew nicely, but one has to wonder if the glory days of margin expansion are also drawing to a close. For 2010, Wal-Mart sees a mere 5% to 8% advance on the bottom line, a small spurt in an industry that should be doing better than that if the economy is in fact turning the corner.

Analysts know this isn't the go-go Wal-Mart of their youth. They see revenue growing 5% this year and 6% next year -- with annual earnings growth just shy of 10% along the way. The stock has traded in a ridiculously tight range over the past year, between $47.00 and $55.20 despite the market's generally buoyant ways in that time.

Then you get to its most recent head-scratching move: buying up digital-video service Vudu this week. Wal-Mart has proved that it's not cool enough to be a digital powerhouse. Between social networking, digital music, and blogger wrangling, Wal-Mart's been a cyberspace dud beyond its flagship e-commerce site. Instead of concentrating on being the best seller of the gadgetry that's required to consume digital entertainment, Wal-Mart is spreading itself so thin that it doesn't recognize familiar traps.

I can applaud Wal-Mart's share-repurchase efforts. I also realize that Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) was an aggressive buyer last year. The future of Wal-Mart, though, isn't all that promising. The retailer held up well during the recession, but it's not the stock you want in a recovery now that its growth potential is bumping against the ceiling.   

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting tossed. Let's go over three new fill-ins.

  • Amazon.com (Nasdaq: AMZN): Wal-Mart's lackluster fourth quarter doesn't mean that holiday shoppers weren't spending this season. It only means that they weren't hitting up Wal-Mart. Amazon's fourth-quarter sales soared by 42%, and the leading online retailer didn't have to sacrifice markups to make it happen. Earnings popped 71% higher. It's true that investors need to pay up for that kind of heady growth, though Amazon is cheaper on a free cash flow basis than its lofty earnings multiple suggests.
  • TJX (NYSE: TJX): As Wal-Mart expanded into groceries to overcome maxed-out opportunities, smaller chains such as TJX's T.J. Maxx and Marshalls have cashed in on Wal-Mart's identity crisis by specializing in discounted apparel. TJX posted stellar quarterly results this morning, with adjusted profit more than doubling as comps rose a hearty 12%. Investors who miss Wal-Mart's glory days should be checking into TJX and Kohl's (NYSE: KSS) -- which reports tomorrow -- as the discounters with serious upside potential.
  • Netflix (Nasdaq: NFLX): If Wal-Mart thinks it can matter in digital video -- an area where even Amazon.com has struggled -- it's going to be in for a rude awakening. Netflix is the only one that has gotten premium online streaming right. It's offering streaming video to most of its 12.3 million subscribers at no additional cost, meaning piecemeal services such as Vudu can't stand a chance.

Sorry, Wal-Mart. If I want "Everyday Low Prices," I'll just pull up your stock quote in a few years.   

Berkshire Hathaway and Wal-Mart are Motley Fool Inside Value recommendations. Amazon.com, Berkshire Hathaway, and Netflix are Stock Advisor selections. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services, free for 30 days.

Longtime Fool contributor Rick Munarriz always takes out the garbage. He owns shares of Netflix and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.