Ever Think Billionaire Warren Buffett Sold Out of Walmart for a Real Reason?

 | Feb 17, 2017 | 9:00 AM EST
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Warren Buffett has never struck me as someone who would do something drastic without very careful consideration. That's why the billionaire investor's recent actions on Walmart (WMT) could be quite telling.

Berkshire Hathaway's  (BRK.A) (BRK.B) head cheese sold off his entire $900 million stake in Walmart, according to a 13F filing this week. The sale left Buffett with no exposure to the dividend-paying world's largest retailer. Just think about this: Buffett decided to take that money from Walmart and allocate it toward several new positions in airlines, an industry he once detested. Further, the complete Walmart stock dump comes as the company has made early, impressive strides online under Jet.com founder Marc Lore to close the gap with Amazon (AMZN) while also enjoying decent sales trends in the U.S. Pretty interesting.

Ultimately, the likely well-timed sale by Buffett may indicate a few things.

First is that 2017 could prove to be a challenging year for Walmart. Although Buffett is by no means a short-term trader, the reality is that Walmart's stock could come under pressure this year from a number of factors. For instance, gas prices and food inflation have picked back up, which may zap consumer spending. To be sure, that was a mild takeaway from fourth-quarter earnings reports from packaged goods giants Coca-Cola (KO) and Action Alerts PLUS holding PepsiCo (PEP) (and data from Nielsen the industry uses). Moreover, tax refunds will likely be delayed for many households this year. Walmart's business often thrives during tax season. Delays could push out that pickup in business or make people think twice about instantly spending all of their checks on a new 50-inch TV.

When Walmart reports next Tuesday, it will probably give Wall Street a taste of all this both in terms of its fourth-quarter sales and first-quarter guidance. 

 

Beyond the short-term considerations, Buffett perhaps sees the writing on the wall in the battle between Walmart and Amazon. In effect, Walmart has just opened a can of worms. 

Walmart announced a new, free two-day home shipping service on Jan. 31. What makes it significant is there is no membership fee. Just last May Walmart began testing a two-day shipping subscription service called ShippingPass that mirrored Amazon's successful Prime service. Members to ShippingPass received free, two-day shipping for $49 a year compared to $99 for the similar service at Amazon Prime.

Walmart also lowered the minimum purchase required for free shipping to home to $35 from $50. While these are great initiatives (and needed), they could also trigger margin compression for the company during a time of rising labor inflation (hourly wages, benefits, etc.). Walmart has to find more cost savings beyond layoffs at its headquarters. And since it hasn't, someone like Buffett may have simply seen a long-term outlook of pressured margins due to the need by Walmart to get more aggressive online.
 
And finally, there is this tidbit. Walmart shares have lagged the Dow Jones Industrial Average during one of its hottest streaks ever. If that isn't a red flag, not too sure what is.

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