Dow-30 component Wal-Mart Stores (WMT - Free Wal-Mart Stock Report) is the undisputed king of retail. That’s true regardless of what end of the business youUsing the VL Page_Business Disc examine, though the company only operates on the discount side of the spectrum. In fact, the shares of the world’s largest retailer, a fact noted in the Business Description section of the report, has been on a particular roll of late.

As the Graph clearly demonstrates, the stock has broken out of its decade long price range between the mid $40s and mid $50s. Toward the end of 2011, it reached $60 and has since gone as high as $73.50 (the annual high and low prices are shown above the Graph). The relative outperformance of this price increase can be seen in the dotted line toward the bottom of the Graph.

The dotted line represents a stock’s relative strength, or, put another way, it shows how the stock performed compared to the broader market. In Wal-Mart’s case, the line shows that it had been a laggard performer since 2002, spiked during the recession as investors flocked to a stable name that was likely to benefit from consumers trading down to save money, and then resumed its poor relative performance when the markets started to head higher again. Another upturn, Using the VL Page_Timeliness Ranks Boxhowever, began in 2011, with the last few months of this yearUsing the VL Page_Graph showing particularly strong relative performance.


This recent outperformance is further validated by the Total Return box, which is at the far right of the Graph. Note that the trailing one-year return through June shows Wal-Mart stock’s total return of 34.8%, materially outdistancing the broader market’s loss of 4.1%. The Timeliness Rank, found in the Ranks box, was recently raised to 2, Above Average. This suggests that the stock will outperform the broader market over the next six to 12 months.

Just a year ago, however, this stock was being treated like a leaper, trading at multiples well below its historical norms—and even further below its historical highs. For example, looking at the historical portion of the Statistical Array reveals that the average annual relative P/E for Wal-Mart has varied between the high of 2.47 in 2000 and the low of 0.78 in 2011—last year. The relative P/E was below 1.00 for most of the past 7 years. As the Top Label that runs across the top of each Value Line report shows, the retailer’s relative P/E was recently 1.04.

Using the VL Page_Capital StructureBased on the historical precedent, it is hard to suggest that Wal-Mart is overvalued at current levels. In fact, the recent dividend yield of 2.2% is still toward the high end of its historical range. However, the quick rise in the share price is somewhat disconcerting. How different is Wal-Mart today than it was in the middle of 2011? The answer is that it isn’t all that muchUsing the VL Page_Ratings Box different. What has changed is investor sentiment.

Investors can be fickle beasts, changing their minds as quickly as the wind changes direction. While Wal-Mart remains a very solid company—it retains Value Line’s highest score for Financial Strength (A++), Stock Price Stability (100), and, based on those two proprietary measures, earns Value Line’s highest Rank for Safety (1). (The first two measures can be found in the Ratings box at the bottom right of the report, while the Safety Rank is displayed in the Ranks box.) Moreover, the company has a reasonable level of debt and more than $8 billion of cash on the balance sheet (debt as a percentage of total capital is shown in the Capital Structure box, while cash is shown in the Current Position box just below it.)

Using the VL Page_Current Position BoxMore aggressive investors seeking to reduce their risk by owning a financially strong company that appears to be rallying on market sentiment would do well to consider Wal-Mart shares. Indeed, once momentum gets going, it can keep going for some time. More conservative investors, however, may want to be more cautious. The shares could easily continue heading higher, but this is not the same company it was in the late 1990s.

As the Business Description explains, it is heavily reliant on its grocery operations—a notoriously low margin business. It wasn’t as reliant on grocery sales in the late 1990s, as it was still aggressively expanding. Indeed, with 55% of U.S. sales now coming from that category, material earnings growth is likely to be driven by foreign expansion. With foreign markets throughout the world sluggish, at best, that growth may not materialize fast enough to satisfy investors with short-term horizons.

In fact, there has been a notable advance in the shares of many financially strong dividend paying companies, a large number of which have been reaching 52-week highs. It certainly appears that Wal-Mart Stores is caught up in that advance. This isn’t to suggest that Wal-Mart, or any of the other companies for that matter, isn’t a great company. Nor does it suggest that this stock, which had been selling in the “value bin” for some time, isn’t going to continue to advance. It is merely a suggestion that more conservative investors make sure not to get caught up in the market’s penchant for excess—at the very least, Wal-Mart appears fairly valued at recent levels.

At the time of this articles writing, the author did not have positions in any of the companies mentioned.