Broader stock markets are going into the second quarter of 2023 with some remarkable strength. Only time will tell what the next course will be as the S&P 500 pushes toward the 4,200 mark. It's been a long bear market, and though there have been recent events (think bank failures) fuelling pessimism and negativity, it's been tough to keep the dip buyers from jumping in and landing quick gains this year.
Even as more folks become more willing to brave this stock market, disciplined investors should not neglect defensive positioning. A recession is still expected to hit at some point this year. And though it seems like it's much too late to play defense, I do think valuations in some of the defensive corners (think consumer staples) look enticing.
Only time will tell if now is the right time to go into risk-on mode with the stocks that fell the most in 2022. Regardless, investing should be more about finding the best balance between offense and defense. By striving to find the right balance, investors can come out with acceptable results regardless of which trajectory the broader S&P 500 or Nasdaq moves over the coming weeks and months.
Walmart Inc. (WMT, Financial) is one of the defensive plays that seems to be an enticing value in my opinion as shares look set to rally and break out of a multiyear period of consolidation. Shares of the grocery-heavy retailer are at late-2020 levels at just shy of $150 per share. Walmart stock plunged violently last year (by over 25%) on the back of some soured quarterly earnings results.
Still, the recovery since the lows has been quite impressive. I think Walmart stock still has room to run as the company looks to make long-lasting improvements and investments in the right areas. The impressive grocery side of the business makes Walmart a retail play that's easier to predict through a downturn. However, grocery isn't the only reason to hang on to shares.
Getting tech-savvier by the year
Walmart has done a marvelous job of adapting to the e-commerce era. It's a brick-and-mortar behemoth at heart. That said, it's quickly becoming an omnichannel powerhouse that could reshape how investors think about retail.
The company continues to invest in technological initiatives, which should help improve its positioning relative to other tech-savvy retailers early to the e-commerce party. Recently, Walmart spruced up its digital presence with a cleaner design on its website and mobile app. Indeed, it doesn't seem like it'll be too long before Walmart can deliver an experience as seamless as the one provided by Amazon (AMZN, Financial).
Walmart's chief e-commerce officer, Tom Ward, has done a great job of modernizing Walmart's online presence. The enhancements likely aren't done yet as Ward and the company look to modernize the online shopping experience.
More recently, Walmart laid off more than 2,000 employees from five warehouses focused on fulfilling online orders. Undoubtedly, Walmart, like so many other retail and tech companies, is feeling the pinch of macro headwinds, and it's doing its best to move through a painful time for broader markets.
Despite the job cuts, analysts like those at Evercore ISI still believe Walmart can increase its market share as management looks to improve upon efficiencies while enhancing its physical and digital presence.
Valuation seems modest given where we are in the market cycle
At the time of writing, Walmart trades at a price-earnings ratio of 34.74 and a forward price-earnings ratio of 23.1 (based on estimates from Morningstar (MORN, Financial) analysts). As a more defensive retailer, Walmart is better positioned to make it through even a "hard landing" for the economy, so I think it deserves higher multiples at this point in the market cycle.
A hard landing could help Walmart gain more share over many of its peers as more consumers flock to Walmart for great deals on necessities and food items. Still, a softer landing (or no landing at all) would likely still give Walmart the jolt it needs to breakout to new highs due to the implications for higher inflation. Walmart stands to gain a lot from the grocery shoppers who are struggling to make ends meet. Even if customers don't struggle as much and inflation evens out soon, discretionary items tend to command fatter margins relative to grocery items.
Final thoughts
Walmart is a very well-run retailer that recently increased its dividend for the 50th straight year. Sure, the latest 2% dividend hike is modest, but given the magnitude of the headwinds retail has experienced, I'd argue that even a small increase to the payout is respectable.
Overall, I view the company as well-equipped to gain market share regardless of how the economy sticks its landing. Even as consumer spending stalls out and savings are depleted due to high inflation, I'd look to the supply chain efficiencies (and other prior investments to improve operations) to help Walmart power impressive quarterly results moving forward. At these levels, I view Walmart as a terrific value, whether or not a recession drags down the S&P 500 for the rest of 2023.
