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Why Staples and Walmart boast attractive valuations

By Sherman Lee


The S&P 500 Index (SPX) returned +5.24% in Q2-2014 compared to +2.92% in the same quarter last year. During the second quarter, the market continued its upward spiral breaking another all-time high as the S&P 500 index reached an intraday high of 1,964.24.

Midway through 2014, the U.S. economy appears to be firing on all economic cylinders. According to media sources, real GDP growth, job growth, and corporate balance sheets are all improving and gaining steam.

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Job growth and the wealth effect via asset appreciation continue to spur consumer spending and home buying. Additionally, office supplies and related products should pick-up as more employees enter the labor force. To that end, spending on home, office, and everyday items should enjoy better economics over the foreseeable future.

However, the stock market is painting a different picture, at least for discount variety store Walmart (WMT) and office supply chain Staples (SPLS). Since the collapse of Lehman Brothers and the bailout of the banks in September 2008, both these stocks have underperformed Home Depot (HD), SPDR S&P Retail ETF (XRT), and SPDR S&P 500 ETF (SPY) by a considerable margin.

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Price and Valuation Metrics as of 7/5/14:
Company Price P/S P/B P/E Fwd P/E PEG Ratio
HD 82.05 1.41 9.23 20.86 16.03 1.15
SPLS 11.26 0.31 1.16 13.58 11.61 -9.74
WMT 75.75 0.51 3.34 15.64 13.45 1.81

Source: Yahoo Finance

Given this backdrop, I reduced two holdings in the Prudent Value portfolio on price strength and initiated five new positions in the second quarter, including two in the retail space (SPLS and WMT) to take advantage of the attractive valuations (see table above). Notwithstanding slower growth, SPLS and WMT look to benefit in the immediate future as jobs and home prices continue to improve.

The largest position added to the portfolio in the second quarter was WMT. WMT, is a multinational retailer based in Bentonville, Arkansas that runs chains of large discount department stores and warehouse stores ( Sam's Club), including online operations,

The company is the world’s largest by revenue at $476.3 billion (FY Jan 2014) and is the biggest private employer in the world with over two million employees. WMT is engaged in the operation of retail stores located throughout the United States; its wholly owned subsidiaries in Argentina, Brazil, Canada, China, Japan and the United Kingdom; its majority owned subsidiaries in Africa, Central America, Chile, China and Mexico; its joint ventures in India and China, and other controlled subsidiaries in China.

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