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Should You Keep Avoiding Walmart After A Record 2020?

In the last few months, I’ve written two separate articles telling you to avoid investing in Walmart until its stock became cheap enough to buy…

Today, I give an update after it released its latest earnings and answer – Should You Keep Avoiding Walmart After A Record 2020?

You can read the past articles in full using the links above.

But let’s get to today’s article.

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Years after its founding, Walmart dominated the entire retail industry after dethroning the likes of K-Mart, Sears, and others.

Its dominance was so complete that entire cities planned new major developments around Walmart’s anytime a new one came to a town.

And it continued to dominate even as the internet took the world by storm… But then it got a bit complacent.

For years, Walmart did almost nothing to capture online sales as the internet took off.  And this put it behind the likes of Amazon as it came to dominate online sales.

A few years ago, this realization led Walmart to focus on growth… Not only by revamping its retail stores… But also, by investing billions of dollars into becoming a giant online.

This spurred a “war” between Amazon and Walmart to dominate the online sales and delivery space that’s still going on as I write this article.

And this so far mostly friendly competition between the two retail giants has helped both companies enormously.

Amazon rocketed past Walmart and is now the 3rd largest company in the world based on market cap.

And after years of stagnation, Walmart just released its most up to date quarterly earnings on February 18th, 2021 that not only saw it return to the rapid growth it had in the 80’s and 90’s… But so much growth that it produced record numbers in 2020.

  • Walmart same store sales grew 7.3% in the 4th quarter to $152.1 billion.
  • Full year 2020 sales grew 6.7% to $560 billion.
  • United States online sales grew 79% in its full fiscal year.
  • Operating profit grew 9.6% in the full year to $22.5 billion.
  • And it produced a whopping $36.1 billion in cash flow from its operations in the full fiscal year.

While most of the world struggled with 2020 due to the pandemic… Walmart crushed the year and reached record heights and is now the 13th largest company in the world.

But these impressive earnings apparently weren’t impressive enough because Walmart shares fell more than 5% after the announcement.

Why?

Because Walmart CEO Doug McMillon during the earnings call with analysts said that while 2020 numbers were fantastic…  He expects 2021 numbers to be down due to less “frenzied pandemic related buying.”

The last two times I wrote you about Walmart I said we should avoid buying its stock for two reasons.  One minor and one major.

  • Minor issue – its relatively low profit margins and cash flow production.
  • Major issue – it was overvalued.

With record high profits and cash flows in 2020 combined with a falling share price is Walmart now cheap enough to buy?

Unfortunately, it still isn’t…

Its P/E is now 29.1.

Its P/CF is 10.9.

And its forward P/E is 23.8.

These show that Walmart is still overvalued right now even after its recent 5% drop. And this means it doesn’t offer you enough margin of safety in investing terminology.

When you invest in stocks that have a margin of safety it makes the investment safer.  And it also means you should expect to earn higher returns owning it in the coming years.

The inverse of this is also true…

When you invest in a stock without a margin of safety it makes the investment riskier.  And it also means you should expect to earn less owning it going forward.

With Walmart being overvalued it not only makes the stock riskier to buy… But it also means you should expect to earn lower returns owning it going forward.

When I recommend an investment, I think about the long term… Not the short term. And these things still mean it’s not a great investment right now for the long term.

Even though it produced record numbers last year.

Why?

For these reasons – and the ones in the previous articles – I recommend you continue to avoid buying new Walmart stock.

Mainly because I’ve found you better potential investments that offer the chance for higher and safer returns.

Until then, use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

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