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Monday, April 25, 2011

Tumbling WMT is healthy sign for the economy, isn't it?

We were given fictitious $250,000 to invest in 5 securities by our professor during one of the electives of the grad school. Investment Analysis it was. The objective of our portfolio was to preserve our capital. Those few lucky securities chosen by us were WMT, FDO and healthy weight on treasury bills. Based on our security selection and objective, I wonder any one cannot assume what period it was. Right? Yes, it was the midst of catastrophic recession which started in the 2007.

The best performance of WMT and the worst performance of NASDAQ Composite Index relative to each other during last 5 years, took place during the recessionary period. And that is the reason why we love to consider WMT as a recession-proof stock. But if we observe the charts now, NASDAQ composite and other market indices are quickly approaching to the higher returns. These are the signs of early expansion which are not preferred by discount stores like Wal-Mart who have been reporting consecutive decline in sales. Their stock is pretty much down from where it was during the great recession. If that is not enough, recent hike in gas prices and inflation have worsened  the outlook for the discount stores.

Wal-Mart has been trying various strategies to regain their momentum despite of negative correlation with the markets:

  • Recently, they have announced to acquire Kosmix which discovers social content by topic. This acquisition may bring Wal-Mart to the new age of social media influence on electronic and mobile commerce. When a retail mammoth taps the Silicon Valley, it has to be something strategic. And these are the impediments behind the expansion of WalmartLabs. 
  • Few days ago, they tested their online grocery store. This may have been game changing event if consumers easily adapt to this service. It can definitely give Wal-Mart some edge over its peers.
  • After successful entry in the Chicago market in the 2006, Wal-Mart began to think over the New York City market which has high barriers for entry. And based on poll results in the early 2011, New Yorkers showed positive response to embrace Wal-Mart.
... and if these help them perform well and beat the market, do we have to remove WMT from the list of those recession-proof stocks?

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