Stocks had a very ugly day on Friday. All the major indices (SPY, DIA, IWM) were down well over 2% on the day as stagflation once again came to the forefront. Gas prices over $5.00 per gallon and rising food prices are putting a crimp in the consumer.

Yet there were still a few stocks that showed glimmers of green during the market massacre. One was the previously punished and pummeled Walmart (WMT).

Most investors are aware of the recent troubles from both Walmart and Target (TGT). Earnings were dramatically affected by rising fuel and labor costs along with an inventory build. While the company lowered profit expectations it actually raised the sales outlook. Still, WMT stock paid the price and dropped over 20%.

Shares, however, are looking decidedly more attractive at $120 versus $150. Here’s three reasons why the worst is likely over for WMT stock.

Valuations

Walmart is a Buy rated stock in the POWR Ratings. It is also in the Strong Buy rated Grocery/Big Box Retailers Industry, ranking number 14 out of 37. Current Price/Sales stands at a three year low of just 0.58. While the latest earnings were a disaster, the market reaction is likely getting overdone.

WMT now trades at well under a 20x P/E on a 2023 forward basis. The dividend yield is a respectable 1.84% with a payout ratio under 50%. This is just the kind of stock that will be a safe haven for investors and fund managers to gravitate towards in this market environment. Maybe that’s why the average analyst price target is still a rather robust $157 per share.

Technicals

WMT stock reached extremely oversold readings following the earnings torpedo before finding their footing. 9-day RSI printed at a two-year low before strengthening. MACD also reached an extreme then turned higher. Bollinger Percent B got to deeply negative territory but is now solidly positive. Previous times all these indicators aligned in a similar fashion marked significant lows in Walmart stock.

As mentioned, Walmart was one of the few stocks that actually rose on Friday. WMT stock added on 0.56% compared to a nearly 3% loss for the S&P 500. Shares once again bounced off the major support area near $120. WMT initially opened lower and near the lows of the day only to pivot and closer higher and near the highs of the day.

This type of reversal pattern is many times a sign of that the previous trend has come to an end. The sellers may finally be exhausted, and the buyers have taken control. It is an even more powerful signal given that it took place at a major support area.

Sentiment

Walmart is normally viewed in favorable light during stressful economic times. Real wages have fallen nearly 3% from a year ago due to red-hot inflation. Households still must put food on the table and diapers on the babies but are now much more price sensitive. This favors the lower-priced retailers like Walmart.

WMT stock is a solid defensive stock that normally out-performs during bear markets. Now that the earnings cloud is beginning to lift a little, look for a beaten and battered Walmart to be a relative out-performer to the overall market over the coming weeks.

The POWR Options Portfolio took a bullish call position in the August $125 calls on May 23 following earnings. We exited the trade on June 6 for an overall net gain of 27% as Walmart shares stalled near the $130 level. The portfolio may very well look to re-enter a new bullish call trade now that WMT once again held support.

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What To Do Next?

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All the Best!

Tim Biggam

Editor, POWR Options Newsletter

WMT shares closed at $121.70 on Friday, up $0.68 (+0.56%). Year-to-date, WMT has declined -15.26%, versus a -17.67% rise in the benchmark S&P 500 index during the same period.

About the Author: Tim Biggam

Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, 4 years as Lead Options Strategist at ThinkorSwim and 3 years as a Market Maker for First Options in Chicago. He makes regular appearances on Bloomberg TV and is a weekly contributor to the TD Ameritrade Network "Morning Trade Live". His overriding passion is to make the complex world of options more understandable and therefore more useful to the everyday trader. Tim is the editor of the POWR Options newsletter. Learn more about Tim's background, along with links to his most recent articles. More...

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