Wed Feb 05 2014
Live Index (1454 articles)

Go With A ‘Recession Proof’ Player

Sometimes, obvious is best: go with a “recession-proof” player.

Are you worried about slowing economic growth, or worse, looming on the horizon? If so, it might be good to play with a company that managed to show EPS growth during both of America’s most recent official recessionary periods, in 2001 and 2008 to 2009.

What company managed to grow earnings even when the economy was tanking? It was the much-despised low price champion, Wal-Mart (WMT).

When recession struck in 2001 its EPS grew from $ 1.40 to $ 1.50. The more recent “Great Recession” barely slowed this juggernaut. EPS ticked up 7% to $ 3.66 in the year ended January 2009, then kept right on going, registering $ 4.07 the next year while the country hunkered down.

There has been no letup since. Wal-Mart’s board was smart enough to massively increase their share buyback activity during 2010 to 2013 while the stock was trading at only 11 to 13 times earnings.

You might not shop there yourself or like Wal-Mart’s style, but the company’s statistics are impressive. Financial strength, share price stability and earnings predictability garner Value Line’s highest possible ratings. The only reason WMT’s long-term stock performance was about average was the premium P/E of around 40 that it commanded a decade ago.

A relatively well known value investor saw fit to make Wal-Mart his seventh largest holding.

Option-savvy investors can either lock in cash profits, or a great entry point, by selling WMT January 2016, $ 70 puts.

Late on Tuesday afternoon, Feb. 4, 2014, these options last traded at $ 7.00 per share with the underlying shares at $ 72.54. Sellers of these long-term puts collect $ 700 per contract for each 100 share commitment to buy, if exercised, at a net price of just $ 63.00 ($ 70 strike price – $ 7 put premium).

Wal-Mart hasn’t been available to buy at that low an absolute price since just after it gapped higher, 21 months ago, in May of 2012. Trailing earnings at that time were $ 4.57 versus about $ 5.20 today. Quarterly dividends have risen by 26.4% since then.

Stop worrying about trying to call the bottom of the sell-off. Write a few long term WMT puts. That represents nothing more complicated than agreeing to buy shares of a outstanding company at a great price, if exercised.

Anyone willing to buy WMT at a net cost of $ 66.80 per share could consider writing the slightly more aggressive WMT Jan. 2016, $ 80 put at $ 13.20. That higher strike price trades away a little margin of safety, compared with the $ 70 strike, for an extra $ 6.20 per share in upside if WMT rebounds to $ 80 or better by expiration date.

Disclosure: Short WMT Jan. 2016, $ 70 puts

Photo: Walmart Corporate – cc

Live Index

Live Index