Financial Jungle

Recently, I had the pleasure to get to know one of my blog’s readers, Ryan. Like me, he is a cheapskate who likes to sniff around for dominating businesses that are selling at reasonable prices. One of the stocks on his radar screen is the US retail mammoth, Walmart. He thinks a few trends are working in Walmart’s favour:

Hello to those who are fans of Financial Jungle Blog. This will be guest post and here is my bio I am an Economic and Business student in my last year of school. My financial perspective is very debt adverse and value. My desire is to achieve a CFA and Live in Newfoundland and Labrador.

For a long time I have admired Wal-Mart’s business style and prices. What really got me interested in this stock is the beloved US consumer and their homes. The action that pushed me over the top is Wal-Mart was the first store in Canada to low prices to reflect the higher Canadian Dollars verse the US dollar. This has made me convert to shopping as much as possible at Wal-Mart. This post will discuss why you should invest in this stock and maybe take out a HELOC to do this. ( ADDED JUST FOR A JOKE )

In a nut shell here is why I think the stock will have a good 6 to 15 month run. In good times people over spend because they think that times are going to be really good. As well in bad times I think they will over correct. So I think that Wal-Mart will get a much bigger slice of the consumer’s pie even if this pie is a lot smaller. So I think this will bold really well for them.

Here are my reasons for liking the stock.

1.) Lower Housing Prices across the US is eroding home equity.

This is more evident in California and Florida that consist of 12% and 6% of the total population respectively. Might see a big jump in same store sales in these states which are hit hard with the recent housing revaluation.

2.) Without a declining or vanished housing equity the US consumer will have to deal with their credit card debt. To accomplish this why not shop for lower end products and cheaper household items? This will free up dollars that can be used to pay down debt.

3.) Unemployment up and Prices up.

This is were I think the biggest correction will take place. People do not know if their jobs will be around and this will lead to a big over correction in spending. Since a lot of spending is essential and a lot more of this spending will happen within the walls of Wal-Mart. People have to make up for increased dollars they have to spend on gas and other consumers hit by the commodity run.

4.) Effect of Baby Boomers.

This will have the biggest effect and draw to Wal-Mart for their day-to-day consumption. I say this because The US economy has been running at a great clip for basically 15 years baring the tech bubble. Usually in good times over consumption takes place and people do not save like they should.

Why do I call this the baby boomer effect you may ask? Well its because these are the ones who have used their rising housing prices to buy that nice vacation every year and the vacation home. Their financial plan probably was based on the stock market and housing going up slightly or staying flat. Lately it hasn’t been flat it has been down. What’s going to be the side effect of this phenomenon? Who knows but I think that people are going to flocking to Wal-Mart screaming “ I’m sort X years behind on my retirement and better tighten that spending belt a LOT!” This will mean big increases in store numbers for the next few years.

5.) Down stock market

Another nest age taking a downward spiral. Think I’m going to go out and buy that really expensive bottle of wine for supper along with that Gucci pruse. WRONG! These people are going to down grade their purchases because they have no clue what’s going to happen with their finances. Again flocking to Wal-Mart.

What will make the biggest impact on Wal-Mart earnings over the next year will be # 2, # 4 and # 5. Uncertain times will mean that the US consumer will be spending more of its money to reduce debts most likely credit card debt. Maybe Wal-Mart will allow a low transfer rate as long as you maintain X amount of dollars per month at their stores? Lots of options for Wal-Mart to grow in a slowing Economy espically if the housing market and stock market slide even more.

Long Term View.

I think Dell allowing Wal-Mart to sell some of its computers is a telling story of the tired US consumer because they are trying to use WMT distribution network to help its sales. If other brands that you wouldn’t expect approach WMT in droves to team up you no this is a bad sign for the economy. The consumer is readjusting their basket of goods to lower cost merchandise. If this happens I think at this stock will have a good run for 3 to 5 years.

Disclaimer: Whatever expressed in this post is only an opinion. Please do not interpret this as a recommendation to buy.

Disclosure: I have an indirect Walmart holding through one of my Vanguard ETFs.