Walmart Reminds Us Buyback Programs Aren't Dead

Now that the economy is less rosy looking than a year or two ago, fewer company executives report or discuss share-buyback programs.

However, in the most recent quarterly earnings report from Walmart (WMT) we got just that, a big, new buyback announcement. Wal-Mart announced a new $20 billion share buyback program, and it should be noted that Walmart is currently just a $400 billion company.

While on the surface, a 5% buyback amount may not seem like a lot, if you dig deeper into Walmart, that 5% buyback, in reality, turns into a 10% buyback based on today's market capitalization. The reason is the Walton family and family trust and foundation control a little more than half of all Walmart shares.

While the family and its Foundation do sell stock from time to time, they have never sold a sizable enough amount to really move the needle. Thus, it is likely that the $20 billion buyback Walmart announced will be purchasing shares not owned by the Walton family and therefore coming from the stock trading on the open market, which is less than 50% of shares outstanding.

Owning a stock like Walmart or, even better, AutoZone (AZO), which has repurchased around 85% of its stock since 1998, can increase the value of your portfolio over decades of ownership. This occurs even when the company you own operates in a boring, slow-growth, or even cyclical industry, like retail.

Now there is some debate about whether or not you would rather have a company you own buy back stock or pay you a larger dividend.

Some investors would instead take a more significant dividend so they can invest it in other stocks, while some investors would rather that money be used to buy back stock.

This is honestly one of those situations where it is more or less a personal decision on which way you would rather a company give you back part of the profits it earns. Continue reading "Walmart Reminds Us Buyback Programs Aren't Dead"

Look For Pullbacks In These 2 Retail Stocks

It’s been a roller coaster ride of a year for investors, with the S&P-500 (SPY) finding itself down more than 20% year-to-date in one of its worst starts ever before clawing back following a slight deceleration in CPI sequentially (8.5% vs. 9.1%).

One of the hardest hit groups this year has been the Retail Sector (XRT), with a considerable portion of the sector suffering when consumers adjust their spending habits.

While this has led to some investors steering clear of the sector, some names tilt more towards staples than their peers, like Walmart (WMT), and some discretionary names have seen large enough corrections that a harder-than-expected landing for the economy looks mostly priced in.

One stock that fits the second bill is American Eagle Outfitters (AEO), which is down over 65% from last year’s highs even after its recent rally.

While I wouldn’t be in a rush to buy either name with the market short-term extended, I believe they belong at the top of one’s watchlist if they pull back towards support. Let’s take a look below: Continue reading "Look For Pullbacks In These 2 Retail Stocks"

CPI Readings – The Market’s Blight

The Consumer Price Index (CPI) has become the most influential and critical variable in today's market. The CPI readings directly impact monetary policy put forth by Federal Reserve via interest rate hikes, bond buying, and liquidity measures.

Inflation continues to be persistent throughout the economy and the Federal Reserve must balance curtailing inflation without destroying the economy. The impact of inflation is now flowing through to companies and consumers alike. Inflation has reared its ugly head and is now negatively impacting companies' gross margins and dampening consumer demand due to soaring prices, specifically gasoline.

The confluence of rising interest rates, inflation, China Covid lockdowns and the war in Ukraine has resulted in months of selling. The relentless, indiscriminate selling has pushed the Dow Jones and S&P 500 deep into correction territory while pushing the Nasdaq deep into a bear market.

As such, the market appears to be factoring in a worst-case scenario that may result in a Federal Reserve induced recession as a function of over-tightening on monetary policy and/or its inability to combat inflation responsibly to engineer an economic "soft landing". The overall market is in a precarious position, and it'll likely take successive downward CPI readings before rates will stabilize and the markets can appreciate higher.

Inflation – 40-Year Highs

Inflation pushed higher in May as prices rose 8.6% from a year ago for the fastest increase in nearly 40 years. Excluding volatile food and energy prices, core CPI was up 6%.

Both CPI and core CPI exceeded estimates and came in hotter than expected. Surging costs for shelter, gasoline and food prices all contributed to the increase. The latest CPI numbers cast doubt that inflation may have peaked, adding to fears that the U.S. economy is nearing a recession.

The CPI report comes at a time when the Federal Reserve is in the early stages of a rate-hiking campaign to slow growth and bring down prices. May's report likely locks in multiple 50 basis point interest rate increases ahead. With 75 basis points of rate rises already put in place, markets widely expect the Fed to continue tightening through 2022 and likely into 2023.

Target and Walmart Harbinger

Target (TGT) and Walmart (WMT) warned that profits would take a hit from an inventory glut. Microsoft (MSFT) also issued a profit warning and said that revenue would be softer than expected due to unfavorable foreign exchange rates. Strategists say they expect to see more companies issuing profit warnings.

Inventories at some retailers have been building, as consumer demand shifted to different categories as Covid cases fell and consumers returned to social events and other activities. Higher costs also play a role, especially as consumers are pinched by record-high gasoline and rising food prices.

These profit warnings are two-fold:

1) margins will be squeezed by reduced demand and a stronger dollar
2) this may signal the peak of the inflation cycle via inventory glut and rising interest rates.

The former will take time to flow through quarterly earnings, while the latter may finally spur this bear market.

The Importance of CPI

The CPI is an important economic readout as this is a measure of price changes in a basket of consumer goods and services used to identify periods of inflation. Mild inflation can encourage economic growth and stimulate business investment and expansion.

High inflation reduces the buying power of the dollar and can reduce demand for goods and services. High inflation also drives interest rates higher while driving bond prices lower. By comparing the current cost of buying a basket of goods with the cost of buying the same basket a year ago indicates changes in the cost of living.

Thus, the CPI figure measures the rate of increase or decrease in a broad range of prices (i.e. food, housing, transportation, medical care, clothing, electricity, entertainment and services). As CPI numbers rage on and remain elevated, the Federal Reserve must act aggressively to tame inflation.

The CPI readings will become even more important moving forward and have directly impacted market movements and overall sentiment. These CPI reports are becoming more significant as the more robust CPI readings will translate into a stronger influence on the Federal Reserve's monetary policies and downstream interest rate hikes.

The Federal Reserve has reached an inflection point to where they were forced to curtail their stimulative easy monetary policies as inflation, unemployment and overall economy improved. Investors can expect increased volatility as these critically important CPI reports continue to be released through the remainder of 2022.

Conclusion

Inflation pushed higher in May as prices rose 8.6% from a year ago for the fastest increase in nearly 40 years. Both CPI and core CPI exceeded estimates and came in hotter than expected. The Consumer Price Index (CPI) has become the most influential and critical variable in today's market. The CPI readings directly impact monetary policy put forth by Federal Reserve via interest rate hikes, bond buying, and liquidity measures. The impact of inflation is now flowing through to companies and consumers, with Target and Walmart issuing profit warnings.

The confluence of rising interest rates, inflation, China Covid lockdowns and the war in Ukraine has resulted in months of selling. The relentless, indiscriminate selling has pushed the Dow Jones and S&P 500 deep into correction territory while pushing the Nasdaq deep into a bear market.

As such, the market appears to be factoring in a worst-case scenario that may result in a Federal Reserve induced recession as a function of over-tightening on monetary policy and/or its inability to combat inflation responsibly to engineer an economic "soft landing". The overall market is in a precarious position, and it'll likely take successive downward CPI readings before rates will stabilize and the markets can appreciate higher.

However, these profit warnings' silver lining may signal the inflation cycle's peak via an inventory glut and rising interest rates. If this signals that inflation has peaked, then rates may normalize, and the market can appreciate higher over the long term.

Disclosure: Stock Options Dad LLC is a Registered Investment Adviser (RIA) firm specializing in options-based services and education. There are no business relationships with any companies mentioned in this article. This article reflects the opinions of the RIA. Any recommendation contained in this article is subject to change at any time. No recommendation is intended to constitute an entire portfolio. The author encourages all investors to conduct their own research and due diligence prior to investing or taking any actions in options trading. Please feel free to comment and provide feedback; the author values all responses. The author is the founder and Managing Member of Stock Options Dad LLC – A Registered Investment Adviser (RIA) firm www.stockoptionsdad.com defining risk, leveraging a minimal amount of capital and maximizing return on investment. For more engaging, short-duration options-based content, visit Stock Options Dad LLC’s YouTube channel. Please direct all inquires to [email protected] The author holds shares of AAPL, ACN, ADBE, AMD, AMZN, ARKK, AXP, BA, BBY, C, CMG, CRM, DIA, DIS, FB, FDX, FXI, GOOGL, GS, HD, HON, IBB, INTC, IWM, JPM, MA, MS, MSFT, NKE, NVDA, PYPL, QCOM, QQQ, SBUX, SPY, SQ, TMO, and V.