Wal-Mart Ahead of Earnings: Buy, Sell or Hold?

Shares of Wal-Mart (WMT) are off 2% since Friday when a leaked email sounded the alarm on slowing sales. According to the email obtained by Bloomberg News, Jerry Murray, Wal-Mart’s VP of finance and logistics wrote:

"In case you haven't seen a sales report these days, February MTD (month-to-date) sales are a total disaster…The worst start to a month I have seen in my seven years with the company."

“Typically this is a buy opportunity and definitely not a sell opportunity because once that news hits, it’s so quickly that Wal-Mart falls apart, [that] the last thing you want to do is sell into that news because there’s going to be an overreaction,” says Matt McCall, founder and president of Penn Financial Group.

This “overreaction” comes ahead of Wal-Mart’s fourth-quarter earnings report due out Thursday morning. Analysts estimate the company earned $1.57 per share on $128.92 billion in revenues. And for 2013, consensus is $0.09 EPS growth.

“At this point, I’m not quite sure I’m buying in front of earnings because there’s a great chance they’re going to be bad...The question is ‘how bad are they and is it baked into the cake already?’”

The market is expecting the 2% payroll tax break to impact consumer spending, and we’ll start seeing just how much of bite the retailers themselves are bracing for when the bulk of the sector reports earnings in the coming weeks. The key will be to watch guidance.

“A lot of people, when they got their first paycheck, said ‘wow, I’m making less money than I was,’” says McCall. “Maybe for a couple of weeks they don’t go out and spend that money, [but] I don’t think it’s going to make that big of a difference long-term.”

Instead McCall sees an opportunity to buy Wal-Mart’s biggest competitor, Target (TGT). The stock traded down with Wal-Mart after the leaked email, but he believes it’s better positioned right now.

Further, if the economy does take a hit due to the payroll tax cut, McCall thinks consumer stocks could benefit from a trade-down effect. “Wal-Mart was actually up in 2008 when the market was down 38%, so there’s a chance that Wal-Mart can do better,” he says, adding that Kohl’s (KSS) and other middle to lower-end consumer stocks would benefit if there are deeper signs of economic trouble ahead.

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