Walmart has beaten Amazon. No, that’s not a joke. As incredulous as that may seem, let me explain.
• For the period shown on the chart, Amazon stock is up 15.55%, the Dow Jones Industrial Average is up 18.8% and Walmart stock is up 27.65%.
• Earlier this year, many investors were having difficulty understanding why Walmart stock was in our Model Portfolio and Amazon stock was not.
• The belief is deeply ingrained in investors that Amazon is so much better than Walmart. It has been taken for granted that Amazon stock would outperform the Dow, and Walmart stock would underperform the stock market.
• As the chart shows, in the earlier part of the year, Walmart stock and Amazon stock followed the expectations of the vast majority of investors as Amazon stock significantly outperformed Walmart and the Dow.
• Walmart reported earnings that were better than the consensus and the whisper numbers. Stocks move based on the difference between the reality and the whisper numbers. (To see a Barron’s report on Walmart’s earnings, click here.)
• Walmart’s U.S. e-commerce sales grew by 41%. The growth is driven by, in part, strength in online grocery. Amazon owns Whole Foods but Walmart has an advantage when it comes to groceries.
• My reason for holding Walmart over Amazon in the Model Portfolio had nothing to do with traditional fundamental analysis. Based on traditional fundamental analysis, both Amazon and Walmart stocks are very expensive. If you have been around for a long time, you would have already observed that it is very difficult to make money in the stock market based on the widely followed concepts of fundamental analysis using ratios such as price/earnings, price/sales and the PEG ratio. Such ratios and data are widely available for free and the analysis is straightforward based on conventional fundamental analysis concepts; if this really worked, all investors would be rich.
• Walmart stock is expensive but not as expensive as Amazon’s.
• In our analysis, there is a clear path for Walmart to grow earnings by 20% in the next three to four years. That may not seem like a lot, but it is more than what is currently factored into the stock price.
• In my over 30 years in the markets, the only thing I have found that consistently works is getting ahead of the “change.” The premise behind the ZYX Change Method of investing is that most money is made with the lowest risk by successfully predicting change before the crowd. The change in this case is the difference between investors’ expectations and the reality for both Amazon and Walmart shares.
• Investors’ expectations for Amazon were extremely high. This increased the probability that even if Amazon did well, it might fall short of investors’ expectations. This is exactly what happened as the year progressed.
• Investors’ expectations for Walmart were very low. This increased the probability that Walmart might do better than investors’ expectations. This is exactly what happened.
• As the chart shows, Amazon’s stock is significantly more volatile than Walmart’s. Often, but not always, more volatility means more risk. Just based on volatility and all other things being equal, Amazon stock would have needed to perform much better than Walmart stock for the same risk-adjusted return.
What does it all mean?
This is not a call to sell Amazon stock and buy Walmart stock. It depends on your portfolio. The main purpose of this column is to share with you one aspect of “change” that can help you make money in the markets and lessen the risk you take. The stocks of Walmart and Amazon are simply to illustrate the concept.
You can apply this concept to many opportunities in the stock market. In The Arora Report portfolio, there are stocks of Apple AAPL, -0.63%, Facebook FB, -0.50% and Alphabet GOOG, +0.43% GOOGL, +0.51%. Since FAANG stocks sometimes move together, for diversification reasons, it was better to not include Amazon in the portfolio. If your portfolio does not include other FAANG stocks, it is perfectly fine to hold Amazon stock.
Both stocks can move up going into the year-end under one scenario. Please see “Everyone is bullish on stocks all of a sudden — here’s why you shouldn’t be.” For those not in Walmart and Amazon stocks, it is better to wait for a pullback in the Arora buy zones before buying. It is worth repeating that both of these stocks are very expensive.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.