The portfolio is composed of a certain type of company active in sectors that cater to the great underbelly of America: beer, salty snacks, trailers parks and smokes. Another thing, they all pay a reasonable dividend.
Wal-Mart certainly fits this criteria. Within its neat aisles, there is everything a good ole boy could want: cheap threads, fishing gear, guns, fine particle-board furniture and home decor items, and of course, beer.
As a value investment, WMT isn’t too shabby: reasonable price to earnings, good return on equity, and good prospects for growth.
However, on reviewing the fundamentals, one number in particular jumps out: Wal-Mart stock has a paltry, measly 31% ownership by institutional investors.
Other NYSE stocks get more love: a normal range is from 60 to 80 percent. Some of the smaller-cap high-growth stock even sport a number of 99 percent.
But not Wal-Mart.
“The World’s Most Hated Company”
Well, maybe “hate” is a strong word. Maybe saying that Wall Street ‘disdains’ or ‘ignores’ could be more appropriate?
No, hate is about right. According to varied articles in the intertubes and even recent documentaries, “Wal-Mart [is the] World’s Most Hated Company“.
CNN Money: Most Hateable Companies (Not Named BP)
Motley Fool: Does Wal-Mart Deserve To Be Hated?
Wal-Mart has surely had its share of troubles. From accusations of unfair wage practices, to charges that it is destroying neighborhood stores, to the most recent charges of corruption and bribery at Wal-Mart Mexico.
Could it be that the mighty and powerful of finance are sensitive to the sentiments of the great unwashed? Maybe, let’s see..
The so-called “smart money”. You now, mutual funds, private equity advisors, endowments, mega-pension funds, all folks with lots of clever people in the room, and they’re supposed to know how to pick stocks, right?
The financial mainstream will allow that heavy institutional ownership of a stock can be a good thing. With their large share positions, institutions have been known to push for shareholders’ interests with board activism, keeping CEO excesses and general corporate stupidity in check. No doubt this happens.
Large institutions also engage in promoting the stocks in which they have a large stake. Their slickly attired analysts regularly infest the financial media cable channels to talk up their book, as it were. Little Mom-and-Pop investors, in theory, benefit from all this stock promotion.
On the flip side, in a sudden bear market, large institutional investors are as quick to pull the sell trigger as any emotional small retail investor. Some large mutual funds have to quickly dispose of assets to meet redemptions, while hedge funds may have to raise cash to meet margin calls on other short positions.
Or, they may depart a stock en masse, on the strength some particularly bad piece of news.
On the contrarian side, noted value investors prefer a stock which hasn’t been already bid up like an Arabian stallion at a Kentucky horse auction. Very low institutional ownership and low or zero analyst coverage in a small-cap solid company are signs of a bargain, with a fair-market valuation by the general market having not yet occurred.
Should be said that it does take some measure of skill and courage of conviction to stand against the big boys. Someone with big huevos.
Someone like Warren Buffett.
Do As Buffett Does
In the Personal Finance investing space, there is an abundance of chatter on Warren Buffett. Even a good number sites named after him. Buffett is held up as the epitome of the savvy value investor. That’s fine. With Berkshire Hathaway stock trading at over 120,000 dollars per share, I’d say it’s a well-deserved reputation.
Turns out that Buffett’s Berkshire Hathaway own a nice wad of 39 million shares, or 1.1% of the company. Now, Buffett is only #4 on the list, behind Vanguard Group owning by far the largest chunk, at 82 million shares.
I just mentioned Buffett because it came as a mild surprise to discover that he owned a good slice of Wal-Mart. I’d just never heard of it, or could even conceive it. Lots of the negative sentiment for WMT comes from the left, and Buffett is sometimes seen as a a bit of a limousine liberal with his views on the personal income tax. There’s a fair bit of print about his investments in Burlington Northern SF railway. His purchases of Bank of America, Gillette and Coke are well-documented. But Wal-Mart? He even doubled his stake a couple years ago, to the current 39 million shares. But even Buffett himself doesn’t talk about it much.
(just for fun, here’s a link to all of Buffett’s major holdings)
The thought occurred that perhaps Walmart’s sheer size in terms of a $200-billion-plus market capitalization means lower institutional participation. That’s not the case.
Behemoths like ExxonMobil, Chevron and Microsoft all sport numbers from the fifties to the mid-sixties.
So, what’s the basis for this aversion? Maybe WMT is just not that an exciting an investment.
By the Numbers
Just for fun, I looked up a random mid-cap company to plug into the spreadsheet alongside Wal-Mart, Target and Costco Wholesale.
The Cooper Industries Inc (COO) is an unremarkable maker of medical lenses and contact lenses, but the big boys are apparently and positively infatuated with this stock. With a whopping 98% institutional ownership, COO is getting a lot of love.
Apparently a darling of mutual funds and endowments, its numbers compare poorly to Wal-Mart, Target or Costco.
Forgetting about Cooper for now, let’s take a look at Target and Costco. Similar market valuation at around 38 billion, but Costco has the higher 5-year sales growth, 8.13% vs. 3.27% for Target. Target is better than Costco on earnings per share, net profit margin and a more conservative price to earnings ratio (13 vs 26).
But in terms of value, Wal-Mart is better than either one of them: higher earnings per share, return on average assets and return on equity. And higher dividends.
And finally, in another measure for long-term investments, I like to look at the low point after the 2008/09 market crash. Look at row 25 in the spreadsheet above: an investment in Target and Costco would have declined by 55 percent. Wal-Mart only suffered a 21 percent decline.
As for Cooper Companies, it was totally bushwhacked in early 2009, losing almost 87 percent in value.
So much for “smart” money.
Vote With Your Wallet
Wal-Mart wouldn’t be around if customers didn’t patronize it. Big Retail is a highly competitive sector where the nimble survive and the stupid get eaten. WMT has has proven that it can compete with the big-box warehouse model, in retail grocery, and in the standard supercenter space.
Where it excels though, is in attracting the weirdest and most fantastic denizens of the human genome pool.
We don’t always shop at Wal-Mart. We also like ALDI, a local grocery store chain and the Oklahoma Food Cooperative. But for the basics, WMT is a good fit.
Just like Warren Buffett, we set politics aside and send our money where it will bring the most value. While our investment won’t be huge, I’ve put in small limit order of 50 shares at $58 a share. I hope it gets filled before the next Redneck Dividends update.
What do you think, readers? Do you “hate” Wal-Mart, or do you think they provide good products at a reasonable value?
(as always, the preceding was provided for educational and entertainment purposes only, not meant to be investment advice. This is just a blog amongst million of other blogs. Do your own due diligence, and make your own mistakes).