Buy This, Not That: Do These Retailers Deserve a Passing Grade?

Shah Gilani|August 28, 2024

A Note From Amanda: It’s back to school season… which means it’s time to look at two of the biggest players in the retail space. But before you dive in to today’s Buy This, Not That video… you’ve got to check out Shah’s No. 1 seasonal play for September. It’s averaged a 73% gain every September for the past four years!

Click here now to get the full details in a special presentation from Shah.

Now on to this week’s BTNT…

---

It’s the most wonderful time of the year for retailers…

As millions of children across the country are headed back to school.

Back to school shopping kicks off the start of a massive consumer shopping spree heading into the end of the year.

So today, we’re looking at the two of the biggest retailers as they get ready for the final quarter of the year.

There are a few crucial differences between the two… and those differences are enough to make one a BUY… and one NOT.

See which is which in today’s video.

 

TRANSCRIPT

Hey, everybody. Shah Gilani here with your weekly BTNT, as in Buy This, Not That. Today, I want to talk about the two big box retailers.

Yes… The giants who face off against each other pretty much all the time on all levels, and they would, of course, be Walmart and Target.

So take a look at the charts. We’re going to look at both of the charts, and I’m going to give you my explanation of what I see… and tell you which one is a buy, which one is not a buy.

So let’s start with Walmart (WMT). Walmart just about hit it out of the park as far as its earnings, and that’s a good thing.

Looking at Walmart on a one-year chart, that’s an impressive chart. The one thing I don’t like is these gaps here.

These are like technology company gaps where things are just so good that the company gaps up as far as earnings. But look at momentum. The stock is very, very overbought here. Walmart is a gigantic company with a $612 billion market cap. Revenue is $665 billion a year.

It has a staggeringly low profit margin of 2.24%.

These companies have been described as penny companies in terms of what they collect, margin wise.

So, you can understand that this is not a high-growth, high-margin business… but it’s a consistently growing business. Walmart is going back to selling more value products – yes, it always has sold them – but increasingly adding more value stuff.

It has a pretty good discretionary set of products that it sells… staples that it sells. It has a huge grocery business. It’s doing a great job with AI and delivery, the kinds of stuff that make Walmart the largest retailer in the world and as profitable as it is.

That being said, it’s expensive. The trailing P/E is 39. That’s pretty steep for the retailer as we know it.

Quarterly revenue growth is up 4.8%. That’s ok for a big box company… for a giant of this size that makes pennies on the dollar. It’s pretty decent, but the quarterly earnings growth has been negative.

Now, Walmart just reported. The numbers were good. They beat across the board.

But the thing I didn’t like about the earnings report was even though management raised full year guidance expectations, they talked a lot in the call about the second half of the year maybe not living up to Wall Street’s expectations.

So they raised guidance, but then spoke of potential hits in the third quarter and the fourth quarter based on consumers buying down.

So, yes, Walmart steps in there and fulfills that “buying down” need more so than Target. But when a company that has great earnings and the stock gaps up like this… and they say “We’re going to have a good second half in terms of the full year, but it may not be so good.”

That’s confusing to me and worrisome. (By the way, we got something of the same out of Target.)

Is Walmart a BUY? I don’t think so. It’s not a buy down here. I wouldn’t buy it down here. If you own Walmart, you should be thrilled. If you don’t own Walmart, I wouldn’t buy Walmart here. It’s just a lot overbought.

The good news is out. If they have a slow second half, if they don’t meet Wall Street’s expectations – which have now been elevated because of their guidance for the second half of the year – and then maybe some analysts start pushing back and cutting estimates relative to, again, the CEO talking about raising guidance but having challenges ahead in the second half… I wouldn’t buy on that.

If the market continues to go higher, Walmart’s going to continue to go higher. If the market flattens out here, if the economy slows down here, if we fall into some kind of recession, Walmart will hold up, but it’s not a buy. So Walmart is NOT, folks.

Will it be a buy lower? Yes. Let’s see what happens in the second half. I like looking at Walmart a lot lower.

A lot lower, maybe $10 lower. Certainly, we’d love to buy Walmart in the in the $60 range and fill the gap. But that’s going to take a pretty hard knock to the stock to get it back down there.

And dividend wise, it’s not worth it for me to hold with a 1.09% dividend yield on a 41% payout ratio. That means nothing to me.

Again, the thing that bothers me is it’s expensive on a relative basis… on an absolute basis… on a P/E basis… at 39x.

It’s expensive. So Walmart, sorry. Not a buy.

Next up, Target (TGT). Now, Target, I used to own. I’ve made a lot of money on Target.

It’s fallen out of favor with institutional investors. It’s fallen out of favor with me. I’ve been out of for some time.

But let me say this… It’s a lot cheaper than Walmart, trading at a trailing P/E of 16 versus Walmart’s 39. I like that better.

If I were going to buy one or the other, I’d buy Target here. If I think the economy is going to continue to move forward, I would pick Target here over Walmart.

Target is BUY, but it’s a speculative buy.

As the chart loads – it’s taking forever to load – a couple other points.

Target’s quarterly revenue growth was 2.6%. That’s a lot less than Walmart’s 4.8%. But the quarterly earnings growth for the past 52 weeks, the trailing 12 months, is a positive 43%, which is a lot better than Walmart.

We’re looking at the chart here on a one-year basis. There are some gaps, and it’s not quite overbought.

That’s another reason I would buy it now, but it’ll be on a more speculative basis.

As far as Target goes, yes, the profit margins are better versus Walmart.

We got Walmart’s profit targets at 2.34%, and Target’s are at 4.81%. Substantially better.

But Target also has a much better dividend yield. Again, Walmart’s is 1.09%… whereas Target’s is 2.84%, knocking on 3%.

If the stock comes down, you’re going to get the 3% dividend yield on that. Now that at least goes somewhere as opposed to just a shade over 1%.

So to me, it’s more speculative because Target, not unlike Walmart, did guide positively for the full year, but said the same thing that Walmart said, which was that the second half of the year could see challenges.

My words, not theirs, but that’s the bottom line. Could be challenges. Raising guidance, but could be challenges.

Why would you jump in to buy a stock that says that? Because we’re going into the second half of the year. If the market picks up in terms of volatility, then we could have problems across the board. This is an election year, so a lot of stuff could happen.

So if I were going to have to pick, I would pick Target in here. I think there’s more potential upside than with Walmart.

But the caveat to that is Target sells more discretionary goods than Walmart. Walmart has more value, more groceries, relative to Target’s mix.

So I think if we do see a hard slowing down in the economy, we do fall into recession, Target may get hit harder, and people will look for the deeper values at Walmart.

But if that happens, you don’t want to be in either one of these. So, again, if I had to choose right now, I would buy Target if the market continues higher. Not Walmart.

I’m not sure about the second half for either one of them based on commentary from both CEOs. I say both of them right now are not worth you throwing some cash out. There are better stocks to play.

But that being said, this is Buy This, Not That. So if you want one, buy Target.

I’ll catch you guys next week. Cheers.