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Don’t Let Wal-Mart Stores Inc Stock Get Away on This Dip

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Thanks to Amazon.com, Inc. (NASDAQ: AMZN ), the retail battle is moving online. Wal-Mart Stores Inc (NYSE: WMT ) is one of few that can give AMZN a real fight there. This morning Walmart reported earnings and Wall Street is hating on it. I want to use this 7% dip opportunity to reload another bet long Walmart stock.

Even though the stock market fell over the last few hours, it is not the cause for WMT's dip. Case in point Home Depot Inc (NYSE: HD ) also reported and it's rallying on the event. WMT is falling because management missed on a couple of important metrics that were integral of the bullish thesis.

First, while they beat the top line, they missed on the bottom line expectations. To me, this is not concerning since I'd like them to go back to their basic strategy of low prices.

I shop at WMT often and I have not seen any benefits from their investment in their employees. Service is still sub-par. Shelves are still out of stock. So for my past few bullish trades in WMT stock, I was going long price action and value not future hopium.

Management also missed on the tax guidance. They expect tax levels that are well off Wall Street's mark. To that, I say that WMT stock price is now back to the launching pad level from their last earnings report which did not have the tax hopium built into it. So it is reasonable to expect those buyers re-emerge to seize the same opportunity.

I prefer some room for error. So today, I want to use the elevated levels of the CBOE Volatility Index (INDEXCBOE: VIX ) and the selling in the Walmart stock to sell risk below support. If it holds then I would generate income out of thin air. Otherwise, I could have the opportunity to buy a good stock at a discount.

Fundamentally, WMT has strong footing. It has a price-earnings ration around 24 and a price-book under 4. So owning it at a discount is not likely to be a major mistake.

Technically, Walmart stock sold off 12% from high to low on this global flash correction. This morning it's retesting those levels which is approaching last November's earnings report demarcation zone. Yes, there is the open gap below $95 per share but it should serve as strong support. Last earnings report was a giant fundamental leap higher so conviction was high. I don't believe that this morning's report negates all of it and then some.

As long as our global fundamentals persist, the bulls are still in charge so WMT dips are long entry opportunities. This is a proven winner in the long term and a disappointing tax note is not going to be the end of it this time.

This morning WMT stock is trading well below the average analyst price target, so they too agree that there is value in this stock. Most of the experts have a hold rating on it so the odds of a deluge of downgrades is pretty low, nevertheless, it poses a temporary risk.

The Trade: Sell WMT JUN $82.50 naked put. This is a bullish trade where I collect $1.30 to open. Here I have an 85% theoretical chance of success. But if price falls below my strike then I accrue losses below $81.20.

Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.

The Alternate Trade: Sell the WMT June $85/$82.50 credit put spread where I have about the same odds of winning but with much smaller risk. Yet the spread would yield 15% if successful.

It is important to note that today's trade doesn't need a rally to profit. I simply need support for WMT stock to hold for the near term. Time will then do the heavy lifting and premiums will expire in my favor.

Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.

Get my newsletter for free here . Nicolas Chahine is the managing director of SellSpreads.com . As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits .

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The post Don't Let Wal-Mart Stores Inc Stock Get Away on This Dip appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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