U.S. Markets closed

China Is Short-Term Trouble for Walmart Stock, but It’s a Great Name to Hold

Josh Enomoto

By all accounts, one of the biggest and most surprising winners this year is Walmart (NYSE:WMT). On the surface, a brick-and-mortars retailer should have no business doing so well in the era of Amazon (NASDAQ:AMZN). However, a doubter just needs to consult the Walmart stock price. At just under $112, shares have gained over 23% year-to-date.

Adaptability and innovation keeps Walmart stock relevant

Source: Shutterstock

In doing so, Walmart proved one thing: a physical retailer can not only survive the ecommerce onslaught, but they can thrive as well. If you broaden your horizons, WMT stock is emblematic of pockets of resistance in the retail segment. For instance, Home Depot (NYSE:HD) and to a lesser extent Lowe’s Companies (NYSE:LOW) have performed well over the years.

Naturally, the question is, why? The easy answer (and the best one, in my opinion) is that certain retailers are insulated from ecommerce. I believe most folks buying power tools or renovation materials want to see the products in person before purchasing.

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Logically, the same principle applies to groceries. With WMT being the one-stop-shop, this sentiment benefits Walmart stock.

Additionally, a convenience factor bolsters the case for WMT stock. Currently, ecommerce companies and the online channels for major retailers are battling over shipping times. For instance, a few months back, Walmart introduced free one-day shipping on orders of $35 or more. That move directly counters Amazon’s robust shipping offerings, but with one major difference: Amazon requires a costly $119 annual membership, while Walmart does not.

As a result, the big-box retailing giant appears poised to deliver the goods, figuratively and literally. However, an old headwind may come back to strike Walmart stock: China.

Trade War and Walmart Stock

Before we dive into the reasons why the U.S.-China trade war poses problems for WMT stock, let me say this: I’m confident in the company’s longer-term outlook. No matter how prevalent ecommerce becomes, there likely will always be a place for the brick-and-mortars.

That said, the Walmart stock price has historically gained on the big-box retailer’s primary business narrative: selling tons of products at everyday low prices.

Thanks to Amazon, that focus has expanded to include online retail channels. Although a smart move, it has stretched Walmart thin. Thus, a poor outcome for future U.S.-China negotiations could hurt WMT.

And here’s why I’m bringing up this concern. From 2007 through the end of 2015, Walmart’s average net margin measured 3.44%. But from 2016 onward, profit margins slipped to 2.21%. The noticeable slip coincided with Walmart’s aggressive push to compete directly with Amazon. For example, Walmart announced its intentions to acquire Jet.com on August 2016.

Walmart stock, profit margins


Click to Enlarge

In the following year, Walmart introduced free two-day shipping. It also acquired several companies to bolster its online presence. To be fair, these moves have largely served to jumpstart the Walmart stock price. However, you also can’t deny that these same moves are costly; hence, the declining margins.

So far, management has a freebie for the pricey strategies because Walmart is a volume king. But should the trade war drag on, management has two choices: protect margins or protect volume. They’ve indicated the former choice, as have most other affected companies.

However, that’s not an easy choice for WMT stock because Walmart’s shoppers aren’t exactly high-rollers. Increased prices will negatively impact volume. In turn, that could put pressure on a company unaccustomed to big threats.

How to Approach WMT Stock

If you’re a buy-and-holder, I think you should be concerned but not alarmed. Certainly, a trade war with the world’s second-largest economy is always a concern for a retail investment like Walmart stock. At the same time, you can trust this leadership team to guide the company out of trouble, similar to what they did with the ecommerce threat.

On the flipside, if you’re a trader, I think it makes sense to trim some holdings here. Since the beginning of June, WMT stock has gained nearly 10%. That’s a pretty strong number for a blue-chip company. And it’s also surprising against a major geopolitical headwind that has not yet found resolution.

Because it’s important to know that the U.S. and China have only agreed to a truce at the G20 summit. That means a temporary hold on ramping up additional tariffs; the respite does not involve removing existing ones.

But China has recently stated that they will only go to the negotiating table once all tariffs have been removed. That’s a tough statement, and if President Trump agrees to it, it’s not clear how that would hold China accountable for intellectual property theft.

Therefore, whatever concerns Walmart had before the G20 summit remains unfortunately valid. That’s the single but biggest hold up on me going fully bullish on Walmart stock.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

More From InvestorPlace

The post China Is Short-Term Trouble for Walmart Stock, but It’s a Great Name to Hold appeared first on InvestorPlace.