As the winter chill of December approaches, the markets have been on fire! Just 2 weeks into the month of November and the Nasdaq is up nearly 10%! This week in particular, we have seen some great retail sales numbers posted for household names like Home Depot (HD), TJX Companies (TJX), Target (TGT), The Gap (GPS), Macy’s (M), Ross Stores (ROST) and many others. All of which beat expectations. Then, there was Walmart (WMT), who reported earnings Thursday morning and came in line with expectations. Although they met the $1.53 expectation, it was the comments from the CEO that sent the stock into a sharp selloff. I immediately received a couple emails from my viewers asking me if now was a good time to load up on the stock due to the significant price decline. Let’s look at the historically normal pros and cons which may influence that decision.

Pros: 

Seasonal Sales Spike: Historically, December has been a strong month for retail, with holiday shopping in full swing. Walmart, with its vast array of products, typically enjoys a surge in sales. 

Historical Performance: Looking back over the years, Walmart's stock has shown resilience and growth, particularly during the holiday season. This trend can be attributed to increased consumer spending, both in stores and online. We will look at the charts in more detail later.

Diversification and Expansion: Walmart isn't just your average retailer anymore. With expansion into e-commerce, a growing focus on sustainability, and ventures into healthcare, it's diversifying its portfolio, potentially cushioning it against market fluctuations.

Cons: 

Market Saturation: As one of the largest retailers, Walmart faces stiff competition, especially during the holiday season. This competition can impact profit margins and, by extension, its stock performance.

Economic Sensitivity: Retail stocks, including Walmart, are often sensitive to broader economic indicators. In times of economic downturn, reduced consumer spending or high inflation, the stock could feel the pinch.

Supply Chain Challenges: The global supply chain issues, accentuated by the pandemic, could affect Walmart's inventory and sales. This impact might be more pronounced during the high-demand holiday season.

Under normal circumstances, Walmart may look like a great long term buy at these discounted levels. However, these are different times. The typical optimism was crushed today when CEO Doug McMillon said, “In the U.S., we may be managing through a period of deflation in the months to come.”.

Given the CPI and PPI data released this week, and the rapid decline in oil prices, it’s becoming more evident that inflation is slowing and the prospects for deflation are right around the corner. If deflation does become a reality, then profit margins for Walmart and other retailers may shrink significantly, resulting in declines in share prices.

To answer the “Is now the time to buy Walmart” question, I would want to know your time horizon. If you’re a daytrader, who cares. Just trade the volatility. If you’re a long-term investor who believes that this is a small drop in a much bigger uptrend, then buy it.  If you’re a swing trader, I don’t think I would be bullish the next few months. If you look back over the last 10 years, the returns for December through February are not pretty. On the chart below, focus on the vertical lines which represent the beginning of the new year. This makes it easy to spot the December through February periods. 

Here are the actual rates of return for those periods:

2022: -5.52% 
2021: -3.81%
2020: -15.49%
2019: -9.63%
2018: +0.99%
2017: -7.79%
2016: +0.97%
2015: +12.19%
2014: -2.27%
2013: -8.28%

That makes for an average of -3.86% rate of return from December 1st to February 28th. 

To Buy or Not to Buy?

In my view, Walmart presents an interesting December conundrum. On the one hand, its historical long-term performance and seasonal sales spikes make it an attractive proposition. On the other hand, the prevailing economic conditions and market competition inject a degree of uncertainty. The deciding factor for me is the historical performance. I’m a firm believer that data puts probability on your side. Based off the fact that Walmart has struggled for the December through February period 7 out of the last 10 years, buying at current levels does not seem appealing. 

If you are a risk taker, you must be comfortable with the inherent risks of a retail giant in a competitive and deflationary market. While the long-term trajectory will most likely continue higher over time, there could still be significant pullbacks from current levels. I for one like the idea of selling cash secured puts to acquire this stock at lower levels. I did sell the $155 puts on Thursday, but a small position. Premium was attractive and I do think Walmart will weather the storm well. I am more interested in the demand zones around $145 and $137. 

While Walmart stock in December has its allure, it's not a one-size-fits-all decision. It demands a personalized strategy, one that aligns with your overall investment goals and market outlook. As always, the most informed decision is the one that best fits your unique financial narrative.

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