Buy the Dip in Walmart Stock

Over the course of the past year, shares of retail giant Walmart (NYSE:WMT) have alternated between big drops and big rallies based on the growth trends of the company’s e-commerce business Fortunately, it looks like WMT stock is on the verge of another big rally.

In late 2017 and early 2018, WMT rallied from $80 to $110 in a hurry as investors became bullish about the company’s digital-led growth rebound. But throughout the first half of 2018, WMT dropped from $110 all the way back to $80 as the company’s e-commerce business slowed. WMT’s digital growth re-accelerated in the back half of 2018, and WMT stock surged over $100 again. Since then, concerns about the macro implications of elevated interest rates and higher tariffs have dragged the shares back to the $90s.

Now, I think WMT is preparing to rally over $100 again.

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There are three major reasons for my optimism about WMT stock. First of all, e-commerce has driven the stock’s performance for the past year, and all signs indicate that the company’s e-commerce business will set records during the holiday season. Secondly, Fed Chairman Jerome Powell’s most recent remarks sounded shockingly dovish, and that is a sign that the Fed may back off its hawkish rate-hike agenda. Finally, Walmart is pulling forward many orders to avoid paying higher tariffs in 2019. That preemptive action should prevent the company’s margins from sinking in the near-term.

Taken together, these factors have increased the chances of Walmart stock heading higher into the end of the year, making WMT attractive in the wake of its recent retreat.

WMT’s Digital Sales Will Hit Record Levels

The near-term outlook for WMT has dramatically improved over the past few days, and that is principally due to the strength of its Black Friday and Cyber Monday results.

Early data suggests that Walmart is poised to have a record holiday season. The retail giant’s Black Friday and Cyber Monday results appear to have been quite bullish, and the data indicates that the shift to e-commerce is accelerating at a record pace. That is great news for Walmart. Walmart stock tends to trade in-line with its e-commerce business (when the e-commerce business is hot, the stock goes higher, and WMT stock falls when its e-commerce business weakens). As a result, the e-commerce business’ strength should provide WMT with a strong tailwind.

Walmart’s e-commerce business was red-hot heading into the holiday period. The company’s e-commerce growth rates had been cooling in late 2017 and early 2018. But they’ve accelerated in the back half of 2018, and last quarter, the company’s e-commerce business grew 43%, setting a 2018 high.

At the same time, the e-commerce growth rates of WMT’s main competitor, Amazon (NASDAQ:AMZN), had slowed down meaningfully heading into the holiday period. So it’s reasonable to believe that Walmart’s digital business could steal the spotlight from Amazon during this holiday season.

Walmart’s Headwinds Are Fading

Over the past month, there have been two headwinds which have weighed on WMT stock. First, higher interest rates threaten robust consumer confidence levels and could weaken U.S. consumers, ultimately resulting in slower growth for Walmart. Secondly, higher tariffs in 2019 could push Walmart’s input costs higher, lowering Walmart’s margins.

But these two headwinds appear to be fading.

The higher rate threat was just significantly mitigated by dovish commentary from Fed Chairman Powell. After having been exceedingly hawkish over the past several months, Powell shockingly sounded much more dovish in his most recent speech. The big takeaway from the speech is that the pace of the Fed’s rate hikes will likely be much slower than anticipated.

Meanwhile, the tariff threat has seemingly been temporarily delayed. There have been reports  that, to avoid higher tariffs in 2019, Walmart is pulling forward many orders , a move which will help prevent its margins from dropping in the near-term. Thus, tariffs should not have a major impact on WMT’s margins in the near-term, and hopefully the U.S. and China will reach a deal before tariffs meaningfully hurt WMT’s results.

The Bottom Line on WMT

The near-term outlook of Walmart stock has dramatically improved over the past few days because of the robust growth of the company’s e-commerce business during Black Friday and Cyber Monday, shockingly dovish commentary from Fed Chairman Powell, and a preemptive move by Walmart to avoid tariff hikes in 2019.

As a result, the recent selloff of WMT stock looks overdone, and the shares will likely rally back to $100-plus levels by the end of the year.

As of this writing, Luke Lango was long WMT and AMZN.