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Stock Club Says Sell Wal-MartGrowth Stock Expert Points at Wal-Mart’s Sliding Share Price
Dr. John Bart's recent condemnation of Wal-Mart as a stock in decline illustrates that critical thinking is a key skill in making wise investment decisions.
Bart, founder of the Canadian ShareOwner Group, recently appeared on the Business News Network show MoneyTalk. His goal was to explain how to distinguish between a stock’s price and its underlying value. Bart strongly believes that investors should buy only high quality growth stocks like Stryker (SYK on NYSE) with long histories of consistent revenue and earnings growth. According to Bart, investors should avoid companies with fluctuating revenue and earnings, which can be red flags indicating mediocre products and management. For example, revenues for Eastman Kodak (EK on NYSE) have been flat while profits have been going down for 10 years. Over the long-term, declining earnings drive down stock prices – leaving Kodak stockholders with grim prospects. Bart said that prices for a great stock inevitably track the upward gains in company earnings over time. Bart refers to these winning stocks as climbers. Stagnating stocks with prices stuck in a sideways range are called sliders. Bart introduced Wal-Mart (WMT on NYSE) as an example. Wal-Mart’s Stock Price Gets Ahead of Itself The former finance professor pointed out that Wal-Mart’s share price went up at a much faster rate than earnings starting about 8 years ago. This overpricing lasted about 3 years, causing Wal-Mart’s stock price to then stall in a sideways pattern despite earnings growth. This disconnect persists to date, with Wal-Mart’s average price-to-earnings (P/E) ratio heading down to around $14 for each $1 of earnings from over $40 in 2001. Based on the declining P/E ratio, Bart called Wal-Mart ‘dead money’ - a condition that will persist for several more years. Instead, investors should focus on the financial fundamentals of companies more promising than Wal-Mart. In addition to growing price-to-earnings ratios and earnings, fundamental indicators include:
Bart advised that a significant deterioration in any of the above fundamentals is a warning to sell a stock. The speed to exit a stock depends on which fundamentals are in decline. Bart sees Wal-Mart’s sideways share price and declining P/E are serious valuation concerns. Bart said that investors need to consider selling stocks like Wal-Mart gradually through a series of purchases (he probably meant sales) so as not to leave too much money on the table for the next guy. Critical Thinkers Make the Best Investors About 7 years ago, John Bart predicted that the share price of Nortel Networks would move sideways. Instead, the value of Nortel’s stock plummeted almost 95% from US$300 (adjusted for stock splits) in 2001 to about $17 today. Wal-Mart may be John Bart’s latest gaff. Currently, Wal-Mart’s current stock price is within 2% of its 52-week low. Earnings for the world’s largest retailer have slowed to about 9% in 2007. However, Wal-Mart continues grow its business profitably, particularly in international markets with formidable prospects for future expansion. Besides, investment guru Warren Buffett holds almost 20 million Wal-Mart shares in his famed Berkshire Hathaway portfolio. Wal-Mart is Berkshire’s 13th largest holding. There are no reports of Warren reducing his Wal-Mart holdings. John Bart’s PhD in Economics does give him some credibility in theoretical studies and university-style lecturing. However, no doctorate is needed to make an informed, carefully thought-out investment decision based on facts. Rather than selling one of Warren Buffet’s core holdings, some critical thinkers are looking to buy Wal-Mart at or below its current price level of US$43.
The copyright of the article Stock Club Says Sell Wal-Mart in Shares/Stocks is owned by Daniel Workman. Permission to republish Stock Club Says Sell Wal-Mart in print or online must be granted by the author in writing.
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