No Surprise at Wal-Mart's Midlife Crisis
Posted by: Doug Gerlach 4/26/2007 8:40:00 PM

This week's (April 30, 2007) BusinessWeek cover story caught my eye: the headline is "Wal-Mart's Midlife Crisis," detailing the retailer's slowing growth and diminished prospects. I, for one, am not really surprised at this revelation. You see, our Investor Advisory Service newsletter followed Wal-Mart until nearly two years ago, June 2005, when it was recommended for sale from subscriber's portfolios. This week's (April 30, 2007) BusinessWeek cover story caught my eye: the headline is "Wal-Mart's Midlife Crisis," detailing the retailer's slowing growth and diminished prospects. 

"For nearly five decades," as Anthony Bianco writes, "Wal-Mart's (NYSE: WMT) signature 'everyday low prices' and their enabler -- low costs -- defined not only its business model but also the distinctive personality of this proud, insular company.... Over the past year and a half, though, Wal-Mart's growth formula has stopped working. In 2006 its U.S. division eked out a 1.9% gain in same-store sales -- its worst performance ever -- and this year has begun no better."

I, for one, am not really surprised at this revelation. You see, our Investor Advisory Service newsletter followed Wal-Mart until nearly two years ago, June 2005, when it was recommended for sale from subscriber's portfolios.

Here's what our analysts said at the time:
"We believe that Wal-Mart has become so large that the company will find it increasingly difficult to generate sales increases of better than 8%-10% a year, perhaps slightly faster than overall growth in the U.S. economy. While still a blue chip company, these growth rates do not justify a high-teens P/E ratio based on the current stock price. We feel the stock could under-perform the market significantly as investors lower the P/E ratio to reflect slower growth. We therefore recommend selling WMT ($47.58) and will discontinue coverage."
In the past nearly two years, Wal-Mart's stock has appreciated a miserable $1.12 to $48.70. Add in a buck and a quarter of dividends and you still don't have much to show for two years of being a Wal-Mart shareholder.

Of course, if you were fortunate enough to sell your Wal-Mart shares back in '05 as IAS recommended, you could have put the proceeds into one of the other three recommended high-quality growth stocks that month. Like Danaher (NYSE: DHR), selling then at $52.35, now trading at $70.13 -- up 34.0%. Or maybe you would have selected Biosite (Nasdaq: BSTE) at $57.07, now selling around $93.05 -- up 63.0%. Or, if you really picked the cream of the crop, you could have put your Wal-Mart sale proceeds into Factset Data Research (NYSE: FDS) at $27.69, now worth $62.52 -- a 125.8% gain.

Of course, hindsight is everything. But the insight of the Investor Advisory Service's analysts is pretty sharp, as well.