Warren Buffett took another major hit last week and, thanks to a unique confluence of events, Buffett’s loss could be your gain.
Let me explain.
You surely saw the news from Walmart (WMT) last week.
The retail king said revenues would be flat this year and next and that net profits would drop between 6% and 12% because of it.
Honestly, it’s not terrible news. It’s not really good either of course. Walmart shares dropped 10% following the announcement.
Buffett’s Berkshire Hathaway (BRK-A) owns more than 67 million shares of Walmart and has so far shed about $500 million because of the drop.
That’s sizeable blow for Buffett and Berkshire and it could all be to your profitable advantage.
Wal-Mart: Great Value or Value Trap?
Let’s start at the beginning here.
Right now, at current prices, Wal-Mart is a solid value.
Just look at the numbers.
The share price drop has pushed its Price-to-Earnings (P/E) ratio down to 12. That’s about half what the overall market is valued at right now.
Also, with the price down, Walmart’s dividend yield jumped past 3% for the first time in years.
The last time the yield was that high was in 2009. Wal-Mart shares went on to nearly triple over the next six years. Huge gains for such a stable and consistent company.
Most importantly -- and the thing we always like to see -- analysts are turning against it.
Now that Walmart shares are down 12% in less than a week and more than 35% from their highs this year, Wall Street is sounding the alarm.
Bank of America, Barclays, Morgan Stanley, Stephens and many more have all cut their ratings on Walmart in the last few days.
Those are all good signs for a stock and make it undeniably attractive.
But here’s the thing…
...and if you understand this, you are going to make a fortune in stocks over time...
...It’s not time to buy Walmart yet.
You see, the problem with Walmart as an investment right now are the huge risks.
First, there is the Christmas shopping season.
Walmart has said one of the big reasons for a decline in earnings is because it has invested heavily in e-commerce.
Will it have been enough to offset Amazon’s dominant position? There’s a very real risk it won’t be enough.
Any bad news when the fourth quarter earnings are released in March next year could easily send Walmart shares tumbling again.
Second, most of the downgrades from Wall Street firms are from “Buy” to “Hold.” That’s really not saying much at all because 96% of stocks are in those two categories.
History has proven consistently the stocks with the rare “Sell” ratings on them outpace the overall markets and all other stocks.
If there is more bad news and Walmart shares slide again, you can bet the “Sell” downgrades will come out then too.
Finally -- and this is potentially the biggest risk of all -- Buffett could be done with Walmart.
Right now Buffett and Berkshire have been silent on Walmart. They’ve offered no opinion, positive or negative, publicly.
However, within the first 45 days of 2016, they are legally obligated to file a SEC Form 13F detailing their holdings at the end of this years.
If that report shows Berkshire is not holding Walmart anymore, watch out, Walmart share will get crushed.
Sell Hope, Buy Despair
All in all, the Walmart story is a big one. But most investors will draw the wrong conclusions from it all.
It’s a simple situation.
Walmart going through a rough patch. No more, no less. It may be just a “dip.” It may be more. Time will tell.
Frankly, these are the times which are precisely the worst time to buy.
I mean, things can go either way at this point.
To invest truly successfully, you’ve got to wait for the extremes. Either at the bottom when all hope is lost and no one sees any turnaround or when everything's going well and you expect it to get even better.
Walmart is in neither of those positions.
It’s not an extreme where the odds are stacked in your favor. It’s a 50/50 bet at this point.
Look for the extreme where the odds are in your favor and, although you won’t win on all of them, you will do very well over time.