Shares of Walmart Inc (NYSE:WMT) are finally showing signs of a rebound after a post-earnings bloodbath. Walmart stock suffered the worst-ever point decline in history, dropping over 13 points (12.64%) from the pre-earnings close of $104.78 to the post earnings low of $91.24 two days later. With WMT now looking more attractive on both a valuation and technical basis following the drubbing, I expect Walmart to head slightly higher over the coming weeks.
Although earnings and revenues were somewhat disappointing in the latest earnings release, it was the big drop in online sales that caused the carnage … let’s call it fears of the Amazon effect.
It is important to note that while growth slowed, it was still solid growth. Indeed, many analysts came to the defense of Walmart stock for that very reason. Guidance was also lowered slightly from $5 to a range of $4.75 to $5 for full year 2019. This would put the forward P/E for Walmart stock at a much more reasonable 19 P/E due to the big drop in share price.
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From a technical perspective, WMT shares were the most oversold on a nine-day RSI basis in the past six months. Previous times when Walmart stock approached this level of pessimism proved to be significant short term lows in the stock. WMT also closed the previous post-earnings gap at the $91.30 level and subsequently bounced higher.
This should provide some solid downside support in the near term. The next level of upside resistance is at the $96.50 area.
Walmart options are comparatively cheap, especially given the dramatic down move, trading at the 36th percentile. This favors trade structures that are long volatility (vega). So a call diagonal spread makes intuitive sense.
WMT Stock Trade Idea
Buy WMT Apr $95 calls and sell WMT Mar $96 calls for a $1.25 net debit.
Maximum loss on the trade is $125 per spread. Ideally WMT closes near $96 at March expiration for the maximum potential gain. The short $96 strike equates to the first level of upside resistance in Walmart stock.
If Walmart is below $96 at March expiration then additional shorter term weekly calls could be sold against the long April $95 calls to further reduce the cost of the trade.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at email@example.com.
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