My recent post about Microsoft received a bit of a mixed review when I talked about the stock being dead money for about 7 years. Some of my visitors argued “but past performance doesn’t determine future returns”, which is a valid point, but I explained that I didn’t see any logical reason why Microsoft would suddenly break above its past trading range. Another somewhat valid criticism of my article on Microsoft is that the S&P500 (and other major North American indexes) actually have a negative return during that period, so Microsoft has outperformed those markets. However, my point remains that Microsoft never even broke much above its trading range during that time, and without a catalyst, I can’t see that breakout happening any time soon. This brings us to Wal Mart.


Wal Mart has been trading in the $45 to $60 range for basically the last 10 years. The stock is yielding a decent 2.3% and is valued at around 15 times earnings. Most analysts seem to love Wal Mart because it appears to be a perfect defensive stock: when the economy crumbles, people stop buying expensive clothes and household goods and spend their money at discounters instead. And Wal Mart is definitely king of all discount stores. This view did play out to a certain extent during the destruction of fall 2008 as the company held its value reasonably well (down about 20%) compared to the markets in general.

However, the proper time to buy a defensive stock isn’t when the economy is in the toilet. At that point, everyone has already purchased these companies, pushing up their multiples and making firms like Wal Mart a much less attractive purchase. Yet – throughout the winter months, the analysts kept recommending Wal Mart. And what exactly did that achieve? The market is up 30% off its lows, while the firm’s shares are just a couple dollars off their 52 week low. Now I don’t forecast huge earnings growth from the company moving forward, it’s slowly reaching critical mass in terms of stores and market share. This isn’t really a bad thing, but you shouldn’t be investing in this company looking for growth that will not show up.

There is nothing wrong with investing in Wal Mart – I can see it moving back into the middle of its trading range (55$) over the next few months. But if you’re somewhat confident in the markets, you can achieve significantly better returns investing in almost anything else. My advice is to stay clear of Wal Mart for the next few years and maybe consider purchasing it the next time the American economy is behaving well and nobody is expecting another recession (because another recession is bound to happen sometime).

The Stock Guy’s Official Ranking: 5 out of 10