The market's perception of a stock is not static.
Take Tesla. At one time, analysts valued this stock as if it were an auto company. Now, according to Jim Cramer, Tesla should be viewed as a tech stock.
What is the result of this change in perception? Tesla has gained about 230% over the past six months.
What other stocks could benefit from a similar change in perception?
Consider the world's largest online retailer, Amazon. Amazon is valued like a tech stock.
Compare that to the world's #1 retailer, Wal-Mart. According to eMarketer, Wal-Mart recently surpassed eBay to become the #2 online retailer:
Wall Street perceives Amazon and Wal-Mart as two very different companies, but Wal-Mart looks more like Amazon every day. For every Amazon offering, a similar item can be sold online by Wal-Mart.
Amazon charges $119 for Amazon Prime, which allows free delivery for one year. Wal-Mart is reportedly about to offer a similar service for $98 per year, which may include same-day grocery delivery.
Wal-Mart's 5000 physical locations in the U.S. and Puerto Rico give the company a substantial advantage over Amazon. That's because customers who return products to Wal-Mart locations have a strong tendency to make purchases while visiting the store.
Meanwhile, returning an item to Amazon drives foot traffic to UPS or Kohl's, or to Amazon Locker. Due to its low level of physical locations, Amazon is missing out.
Now consider the relative valuation of these two stocks. Amazon trades at 143.3 times trailing earnings, according to Yahoo Finance, while Wal-Mart trades at 24.4 times trailing earnings.
Amazon's valuation, as of the July 7 close, is 5.87 times greater than Wal-Mart's. Because of a difference in perception, every dollar earned by Amazon is nearly six times more valuable than every dollar earned by Wal-Mart.
If these two companies are more similar than the market currently perceives, then either Amazon is worth a lot less, or Wal-Mart is worth a lot more. In a bull market pumped with central bank liquidity, I'd go with the latter.
If the market granted Wal-Mart the same valuation as Amazon, the stock would rise to about $740 per share. If given half of Amazon's current valuation, Wal-Mart would trade at $370.
What price should investors pay for Wal-Mart? According to the stock's chart, a pullback to $117.60 would be ideal. That area represents a 50% retracement of the stock's recent rally, and has acted as support on numerous occasions in June (arrows).
The last major resistance level for Wal-Mart is located at the all-time closing high of $132, set on April 16.
In the future. I expect Amazon to eventually establish a greater physical presence, and Wal-Mart to continue to increase its online market share. Eventually, perceptions will change, and the two companies will be valued like the competitors they are.