Walmart’s Earnings Are Going to Be a Blockbuster. Here’s How to Play Them. - Barron's

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When bad things happen to the U.S. economy, good things happen to Walmart. Economic recessions, and especially fears of depression, make everyone think more carefully about how they spend their money.

This more careful financial stewardship tends to benefit Walmart (ticker: WMT), which famously offers low prices at thousands of no-frill, cavernous warehouses scattered across the country. Rising cost consciousness tends to increase Walmart’s sales, which boosts corporate earnings, and this is reflected in the stock price—now dancing around a 52-week high ahead of a pending earnings report that should be dramatic.

Walmart has followed this economic-weakness script since the financial crisis of 2008-09, when people began trading down from steak to chicken and then from white meat to dark meat in an effort to make their money last. The last time we focused on Walmart as an economic crisis investment, the stock was around $53 and the company had yet to truly embrace online sales. Since then, the stock has more than doubled, and Walmart is competing against Amazon.com’s (AMZN) e-commerce model.

The “Walmartification” of America is arguably even stronger now than a decade ago, as the Covid-19 virus has forced huge swaths of the world to remain at home. But because Walmart also sells groceries, the stores are typically allowed to remain open, creating even more of an opportunity to increase sales at a time when many retailers are closed because they are considered by states to be nonessential businesses.

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So far this year, Walmart’s stock is up 5.4%, compared with a 14.5% decline for the S&P 500 index. This relative outperformance will soon be tested as Walmart prepares to report first-quarter earnings, likely in late May, if the past is indicative. In late March, Goldman Sachs increased Walmart’s 12-month price target to $121 from $115, telling clients the stock is well positioned to thrive amid the unusual challenges.

Goldman’s derivatives strategists advised clients that Walmart was one of their top trades for earnings season. The strategists, led by John Marshall, liked Walmart’s June $125 call options when the stock was just under $122. The stock has since rallied a bit, and it makes sense to roll the strike a bit higher to lower the cost of the position.

Investors who want to take a more-aggressive posture could also sell Walmart’s June $120 put options for $4.75. Anyone who does the put sale with the call purchase creates a “risk reversal” strategy that generates a 55-cent credit. In return for the credit, investors are obligated to buy Walmart stock at $120, while participating in rallies above $130. (A call option gives investors the right to buy a stock at a certain price and time, while a put option gives them the right to sell a stock at a certain price and time.)

Clearly, the options market is pricing Walmart’s stock as if it will make an extraordinary move when earnings are reported.

Wamart’s typical earnings-day move is 7%, up or down, compared with an average move of 3.1%, up or down, over the past eight quarters. Goldman has advised clients to expect the results on May 19.

During the past 52 weeks, the stock has ranged from $98.85 to $128.08.

It is difficult to predict when the shuttered U.S. economy will open for business, and it is even more challenging to predict Covid-19’s next move. Yet all indications suggest Walmart is well-positioned to thrive amid economic and social chaos.

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