By: Steve Smith
Many retail stocks have staged a great recovery over the past few months. Some beaten-down names such as Macy’s (M) Foot Locker (FL) and Gap (GPS) rallied 30% during the final quarter of the year, and have started 2018 on a strong note.
While I still think those names, and some other traditional big box retailers like Koh’s (KSS) and Target (TGT) will face some challenging times ahead, it does seem that the predictions of death by Amazon (AMZN) were greatly exaggerated.
In fact, back in late 2016 I wrote about how we were entering a golden age of retail for operators that could make adjustments, investing in both technology and people to give consumers a great experience.
Last year I highlighted how Walmart was making all the right moves to not only compete, but beat Amazon.
At the moment, Walmart stock had just sold off to around $70 following a disappointing earnings report. But I noted the pieces were in place for a strong recovery for both sales and profits, once execution of acquisition of such as Jet.com and initiatives such as order online/pickup in store were implemented.
And while the stock ended up having another major sell-off last summer in the wake of the AMZN purchase of Whole Foods, Walmart stock is now approaching $100, an all-time high, and up some 41% since my original recommendation.
The chart is now in a very steady uptrend and shares are still reasonably valued at just 23x forward earnings.
I think Walmart stock still has room to run over the next few months heading into the next earnings report as investors embrace it as the best and most reasonable alternative to Amazon.
I’m keeping my approach very straightforward: buying a slightly in-the-money call with 90 days until expiration.
Specifically, I’m buying the March 95 calls for $5.50 per contract. These options have over $4.50 of intrinsic value, provide a good leveraged upside potential with a limited risk.