This week let's discuss three Investment Topics worth following and how they may relate to Walmart Executives. The topics are:

1.) The Magnificent 7

2.) WMT Stock Price Reaches All-Time High

3.) Higher and Inverted Bond Rates

The Magnificent 7 (Investments for Walmart Executives)

In 2023, the S&P 500 Index - a stock performance measurement of the 500 largest U.S. companies - has increased 15.5% as of 11/8/23. That is nice, especially after the disappointing performance in 2022, but here is the interesting thing:

If you remove the 7 top performing stocks, the index performance is 0%! In other words, 7 stocks - known as the Magnificent 7 - have driven all S&P 500 investment returns in 2023.

The Magnificent 7 stocks are: Apple, Amazon, Alphabet, Meta Platforms, Microsoft, Nvidia and Tesla.

So, what does this mean for the average investor? Here are the two extreme perspectives in the media (of course, both are likely wrong:)

Sell the Magnificent 7 - The Magnificent 7 are extremely overvalued compared to the other 493 stocks in the S&P 500. The remaining 493 stocks are offering a once in a generation discount.

Buy the Magnificent 7 - The Magnificent 7 stocks are once in a lifetime companies that have combined technology and scale making them immune to competition.

Unsurprisingly, the truth is somewhere in the middle. Yes, over the long-term stock valuations can be an important driver of future performance.

On the other hand, Hendrik Bessembinder of Arizona State University finds that from 1926 - 2020, only 4% of listed stocks accounted for all market gains. The fact that a select few stocks are generating almost all stock market returns in 2023 is actually not unusual.

By diversifying investments across several companies, you increase the probability that you will own the "Super Stocks" that generate most of the market's returns.

Walmart Take: This reminded me of a CNBC Interview with Doug McMillon. In the interview, Mr. McMillon revealed he keeps a photo listing the top retailers over the last 8 decades. As you can see companies come and go but some stay at the top a long time!

Walmart Stock Hits All-Time High

This week, the Walmart share price hit an all-time high of $166.61! In isolation, nominal stock prices are arbitrary, but when a share price hits an all-time high it is fair to question if it is too high.

Quickly, a stock price calculation consists of two components: Earnings and Multiple. Let's solve for Walmart:

Price as of 11/8/2023 using Trailing 12 Month Earnings

So, mechanically a stock price increases when its earnings per share AND/OR multiple increases. Below is a chart showing Walmart's Multiple (Price to Earnings Ratio) over the last 20 years:

So, mechanically a stock price increases when its earnings per share AND/OR multiple increases. Below is a chart showing Walmart's Multiple (Price to Earnings Ratio) over the last 20 years:

You can see that over the last 5 years, the multiple has shifted higher. So, what does this mean? Again, let's look at two extreme perspectives:

Too Expensive: The price increase is due more to multiple expansion than earnings growth. The Multiple was around 15 from the mid-2000s through 2017. The multiple will decrease along with the stock price eventually. 

Strong Growth Ahead: The multiple is higher because the market believes that earnings will grow significantly over the next decade. Walmart's recent investments in omnichannel fulfillment, third-party marketplace and supply chain automation have lowered earnings temporarily but will lead to strong growth over the next decade.

Walmart Takeaway: The main takeaway is that future price appreciation will likely come from earnings growth as opposed to multiple expansion. The higher multiple may be a signal that investors, as a group, believe Walmart will grow its earnings in the future.

Just for comparison, here are the earnings multiples for a few other large retailers. Numerous variables can impact company multiples including different business models, growth prospects and even accounting methods.

Higher and Inverted Bond Rates

Bonds are finally worth investing in again! The 10 Year Treasury is yielding 4.7%. the highest rate since 2007. This is interesting because as you put together an investment portfolio, bonds can actually contribute to investment returns!

The more interesting phenomena is that 1 Year Treasuries are yielding 5.3% which is higher than the 10 Year. Theoretically, that is not suppose to happen as longer term bonds have higher (interest and credit) risk than short-term bonds.

The market is signaling that, as a group, they expect interest rates to decrease in the future. What does that mean? Again, let's take two perspectives:

Headed for Recession - The market is expecting rates to decrease because the economy will enter a recession and the Federal Reserve will need to lower the cost of borrowing.

Headed for Growth - Now that inflation is under control, the Fed will start to lower interest rates further fueling an already strong economy.

Of course, nobody really knows and diversification across asset classes as well as various types of bonds is key.

Walmart Takeaway (IMPORTANT!): Walmart DCMP (and ODCP & SERP) accounts established before 2023 generate investment returns based on the 10 year Treasury + 2.7%. That is over 7% using today's rates.

In my opinion, lending your savings to Walmart for 7% is a fantastic deal! You may have the option to switch to the "market based approach" at Fidelity but you may consider staying the Grandfathered "Fixed Rate" Plan.

Wrap-Up

Thank you for reading! If you are interested in learning more about how Taurus Financial Planning may help you build wealth faster at Walmart, feel free to schedule an introductory call - Calendar Link.

Mark Chisenhall, CFA, MBA

Taurus Financial Planning

Taurus Financial Planning is a Fee-Only Wealth Management firm based in Bentonville, AR. The firm offers comprehensive financial planning, tax planning and investment management to corporate executives across the country.

Taurus Financial Planning is a Registered Investment Advisor with the State of Arkansas. This information is provided as a guide to assist you in your financial planning. The specific examples are provided for illustration purposes only and are not representative of specific investments or guarantees of future returns. Please consult with a professional for specific questions regarding your particular situation. If there is any error or inconsistency between this document and the official company plan documents, your company plan documents will govern.