WMT: Odds on WMT

Keith bought WMT this morning in the Hedgeye virtual portfolio after successfully going 2-for-2 on the short-side in 1Q. We’ve had a bearish view on the company for a number of reasons, but the fact of the matter is that the near-term and intermediate-term setup is now shaping up somewhat favorably for the first time in a while.

Among the factors behind our bearish view were concerns over internal execution, inventory build into year-end, and a hyper-focus on price leadership capping the potential for margin improvement. While not much has changed as it relates to internal execution, the fact of the matter is that it is lapping sins of the past. We have a pretty low degree of confidence that WMT is any closer to right-sizing the ship. But as it relates to the near term setup, expectations appear to be in check and fundamental downside risk is low – particularly on gross margins given the favorable sales/inventory spread, as well as sss comps.

We realize that this does not come across as having outsized conviction in our edge on Wal-Mart’s fundamentals.  And in fact, from a longer-term standpoint (TAIL duration), we’d rather own Target by a long shot.

But when WMT gets to a point where things simply stop getting worse, and the stock looks good in Keith’s multi-factor model, the odds are in favor of a long here.

WMT: Odds on WMT - WMT VP 7 20 11