Wal-Mart: It’s the Ultimate Fiscal Cliff Stock Play Says Sozzi


Expectations are running high ahead of Wal-Mart's (WMT) second-quarter earnings results due out before the bell on Thursday. In addition to analysts boosting earnings estimates, our nation's largest retailer has recently seen a rush of positive news turn its way. Last month, shortly after the big box king marked its 50th anniversary, the stock climbed to a record closing high of $74.80 on July 27th; surpassing levels not seen since late 1999.

Analysts expect earnings of $1.17 a share compared to $1.09 a share during the same quarter last year. Revenues are estimated to be a whopping $115.56 billion, up from $109.37 billion a year ago.

"Expectations are very high. Will they beat earnings? Yes. Will they raise full-year guidance? Yes, but I think that's priced in right now," says Brian Sozzi, chief equities analyst at NBG Productions. "This has been the ultimate fiscal cliff stock play."

Widely seen as an economic barometer, Wal-Mart's price action could be signaling further growth deterioration ahead.

"The stock price is telling you the second half of the year, the consumer is going to trade down; middle income consumers going to Walmart, low-end consumers are going to buy more private label products, and drive tighter margins," he predicts.

And the Walmart empire reaches far beyond the U.S. Sozzi points out that over 30% of sales are done overseas. With a shaky environment here, and growth slowing abroad, it's clearly the price cutting that's attracting more consumers to Walmart.

"Everybody is going to Walmart, and they're doing this because they're lowering prices more often. They're getting traffic, they're taking share. The share gain that's happening in the U.S., it's happening globally," says Sozzi. "So Walmart is really operating on full steam."

While he believes Walmart is the best in the business at managing expenses, his dim economic outlook has him instead recommending Dollar General (DG) as a better investment right now.

And, yes, he put his money where his mouth is by selling his position in Wal-Mart ahead of earnings.

"I like what dollar stores are doing; they're opening up a lot of new units, renovating. I always look at Wal-Mart as the center of the space, and dollar stores are starting to surround that castle and attack them," says Sozzi. "They're [Dollar General] actually growth retailers, and if I can buy them off their 52-week highs like they are now, it's win-win."

It could be win-win investment, but it's lose-lose for the economy and consumers if the economy does indeed take a nosedive.

So, Wal-Mart: buy, sell, or hold? Let us know your thoughts on our Facebook page.

[Note: Breakout co-host Jeff Macke owns shares of Wal-Mart.]

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