We added Walmart (WMT) to Northlake’s individual stock portfolio across the client base.  As always, there could be a few exceptions due to account-level constraints. We like WMT on a fundamental basis, but before we explain that part of the thesis, we wanted to mention two other reasons we made the purchase.

First, WMT is classified as a consumer staple – a sector where Northlake’s portfolio is underrepresented.  Over the past few years, we have strived to add diversification with purchases of IBM, Sony, T-Mobile, and VICI.  WMT continues the diversification, adding a more defensive investment profile vs. the heavy focus we have maintained on consumer discretionary stocks.

Second, we believe that the period ahead for the stock market could be one where active management makes a comeback against the multi-decade passive management trend.  In Wall Street parlance, we believe the years ahead could be “a stock picker’s market.”  The shift at the Federal Reserve from max easing to tightening likely will settle to an environment with more balanced monetary policy.  Super easy monetary policy was a factor that drove very narrow stock market breadth focused on growth companies.  This led the major indices steadily higher since they are dominated by the largest technology companies including Apple, Amazon, Google, Facebook, and Microsoft.  At a minimum, we see a secular shift toward greater market breadth that suggests adding stocks that diversify Northlake’s portfolio could provide value added to client returns.  In direct recognition of a greater emphasis on active management, most but not all of the WMT purchases were financed by the sale index funds.

Looking at WMT’s fundamentals, we believe the company has materially improved its competitive position versus Amazon and other retailers with its efforts at Walmart.com.  The ecommerce offering is now extremely broad and includes fulfillment for third-party sellers much like Amazon.  We believe WMT has done a good job using its massive fleet of stores for in-store pickup of online purchases, a competitive advantage since Amazon and most other retailers do not have the necessary phsyical scale and reach.  We also see the company’s efforts to serve advertising on its ecommerce website as very beneficial.  This revenue source is scaling quickly and offers extremely healthy and accretive profit margins.  Apple’s efforts to restrict ad targeting and emphasize privacy have increased the value of fist-party data.  WMT has a huge trove of data on its customers that is growing every day, especially as Walmart+ (the company’s Amazon Prime competitor) continues to grow.  Advertisers increasingly are seeking out first-party data, and few retailers besides Amazon, Walmart, and Target offer the scale to replicate advertising effectiveness on platforms like Google and Facebook.

WMT’s core store-level business clearly faces challenges linked to the macro economy.  Supply chain issues led to a big earnings and guidance disappointment that drove the stock down from $150 to below $120.  Northlake paid just under $124. Delayed product delivery left WMT with the wrong inventory balance as inflation led consumers to shift spending towards consumables and staples and away from discretionary.  As the nation’s largest retailer, WMT also faces challenges if overall economic activity softens or a recession ensues.  Offsetting these challenges, the company benefits as consumers trade down given its price leadership on virtually all products in the store.

WMT shares trade at 17X 2023 consensus earnings estimates with the P-E being in line with the broad market.  Prior to the recent earnings miss, the shares traded at a P-E of 22 or a slight premium to the market.  In the $150s, the shares were attempting a long-term breakout reflecting the company’s improved competitive positioning.  We like how management has addressed the inventory snafu by moving quickly to eliminate the excess and take the pain upfront.  This should allow earnings to get back on track later this year and the improved fundamentals that were driving stock price breakout to re-emerge.  A move back to the $150s provides a healthy 25% upside and if the economy and market struggle more than we expect, the stock’s defensive characteristics should lead it to hold up well.

WMT is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.