What I’d do with these two hugely successful stocks
It’s never wrong to take a profit, but investors who kept these stock tips would have been rewarded handsomely. Analyst Rodney Hobson reveals what he’d do with them now.
4th September 2024 09:14
by Rodney Hobson from interactive investor
Retail sales are holding up really well in the United States. So it is not surprising that Walmart Inc (NYSE:WMT), the country’s pre-eminent retailer, is doing particularly well. The problem is that continued strong sales are more than fully reflected in a share price that assumes the good times will continue to roll.
US retail sales rose 1% in July, the latest available figure, more than making up for a 0.2% decline in June. It was the biggest monthly rise for 18 months and took the annual increase up to 2.7%. With jobless claims staying low and inflation remaining under control, albeit at above target levels, consumer spending seems likely to persist for at least the third quarter, while a bumper Christmas is in the offing.
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Even if the Federal Reserve Bank sticks with its customary reluctance to act in haste in cutting interest rates, it does seem highly likely that the US economy is in for a soft landing.
Arkansas-based retailer Walmart saw revenue rise 4.8% in the second quarter compared with the same three months last year despite a slightly adverse exchange rate movement. In constant currency terms the improvement was 5%, ahead of the 3.5-4.5% target that Walmart set only three months earlier.
Much of the improvement was driven by online sales that are running 22% ahead, with customers taking full advantage of the option to pick up orders in-store.
Walmart is putting the accent on value, yet it is mostly reeling in households with above-average income, meaning it is winning all round.
Net sales are expected to rise 3.25-4.25% in the third quarter at constant currencies. That implies a slowdown – but not if sales growth once again comes in ahead of the company’s own forecast, which is highly likely.
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Walmart has already raised its annual guidance for sales growth, upping its earlier 3-4% forecast by three-quarters of a percentage point.
So all is going well with the top line. Alas, things are not so rosy at the other end of the accounts. Net profits slumped 43% to $4.5 billion in the second quarter. This sharp decline was admittedly caused by a large one-off credit last year being replaced by a write-off this time, but even so profits are set to slip for the rest of this year.
Source: interactive investor. Past performance is not a guide to future performance.
Walmart shares dropped below $40 just over two years ago (adjusted to allow for a share split earlier this year) as the pandemic took its toll, but they have recovered strongly since and have doubled to the current $78, pushing the price/earnings (PE) ratio to an uncomfortably high 40 and the yield down to little more than 1%.
Source: interactive investor. Past performance is not a guide to future performance.
Sales have also been rising at retail chain Costco Wholesale Corp (NASDAQ:COST), but again there is a lot of good news factored into the share price. Costco stock has tripled from below $300 to $880 in just four years to give a whopping PE of 55 while the yield is a miserly 0.5%.
Hobson’s choice: After tipping Walmart shares at $51, I turned prematurely cautious when $60 was breached, little realizing that the upward surge would run towards $80. At least I advised earlier buyers to hold on. I cannot shake off the nagging feeling that the shares have run well ahead of themselves so I cannot bring myself to recommend buying at these elevated levels. My view is to hold, although those who bought below $50 could consider cashing in part of their holdings to lock in some profits.
I first drew attention to Costco in October 2022, when my buy recommendation at $480 worked really well. Again, I turned cautious too soon, downgrading to hold at $680, but as at Walmart I feel the share price has run up too far too soon. Hold, but consider taking some profits to hedge your position.
Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.
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