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One Reason to Be Bullish, One Reason to be Bearish After Walmart's Profit Warning

One Reason to Be Bullish, One Reason to be Bearish After Walmarts Profit Warning

See the retailer’s warning clearly, but don’t be a prisoner of the moment 

Shares of Walmart (NYSE:WMT) are down nearly 10% the day after the retailer issued a profit warning in advance of its second-quarter earnings in August. The company lowered its guidance not only for the current quarter but also for the full year.

Not surprisingly, the news is being met with a slew of analysts lowering their price targets for WMT stock. And with more economic news due out later this week, the stock may have further to fall.  

What’s happening to Walmart stock now is entirely predictable. And while we don’t advocate that investors engage in market timing, we also advise them not to be a prisoner of the moment.  

With that in mind, it’s helpful to look at stocks for what they are not for what we may want them to be. And in this article, I’ll give you one reason Walmart may still offer investors a buying opportunity and one reason investors may want to avoid the stock for now.  

Target Part Deux 

I’ll start with what I perceive as the bad news. The profit warning issued by Walmart has echoes of the earnings report that Target (NYSE:TGT) delivered in May. When you dive into the specifics, a similar story appears. In an effort to get ahead of supply chain difficulties, retailers loaded up on inventory. However, as consumers are looking to cut back wherever they can, retailers have too much supply.  

That means Walmart, which is known for already low prices, will have to mark down the excess inventory. In this case, that will largely fall on its apparel offerings. This gives Walmart and other retailers a problem that doesn’t have an easy solution. And it’s not a problem that can be solved solely by pricing power.  

Plus, the worst may not be over. There is some data (e.g. lower commodity prices) that suggest inflation is peaking. But it will take some time before consumers begin to feel that in their everyday lives. And the reality is that once inflation enters the economy it takes a long time to wring out if, in fact, it ever does.  

Analysts are Still Bullish...For Now 

Now I’ll give you a bullish reason. And I’ll admit it’s not a strong one. As I mentioned earlier, analysts were quick to lower their price targets on WMT stock. Of the analysts tracked by MarketBeat, 15 issued lower price targets. But none of those analysts changed their rating on WMT stock. And most of the price targets support the consensus price target of $147.10. That’s an approximate 20% upside from the current price of WMT stock. 

To support this point, I’ll go back to the company’s most recent earnings call in May. At that time, president and CEO, Doug McMillon had this to say when asked about the health of the consumer: 

I think it's important to recognize that there is more than one consumer, and we serve the whole country...for some customers, we are seeing some indications of change throughout the quarter, but that's not true for all of them. 

 I’m not sure that the company’s profit warning changes McMillon’s thoughts. At this point, analysts may view it as a company trying to get in front of a bad earnings report. 

The Outlook for the Economy Remains Uncertain 

Your decision on WMT stock will largely depend on your view of the economy. By the time you read his article, the Fed is likely to have announced a 75 basis point increase in interest rates. And later this week, investors will get their first reading on second-quarter GDP.  

All of this is creating a lot of uncertainty. So, no matter how bad the news is over the next few weeks, investors are getting information. And the known is always better than the unknown. Walmart is telling investors what it knows. It’s up to you to decide what to do with that.  

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