In what could be the most important election of 2016, TheStreet is looking for The Worst Stock in the World and we need your help. In these times of market turbulence, it's our job to watch out for the worst investments that can sink your portfolio. Our search is not merely limited to the worst stock in the Dow or S&P. We are going global and accepting nominations from our readers for the absolute worst stock in the world. This article is part of an ongoing series talking about these stocks and why they're the worst. If you have an idea as to what the worst stock in the world is, email us at email@example.com.
Sometimes the worst of anything doesn't show its ugly face right away.
Consider the shiny new employee in the office. Having just started, he/she is working overtime, trying to gain street cred with the more experienced folks. In other words, the shiny new employee could be putting on a façade to win fans in the office. Over time, however, that individual could turn out to be a deceitful person who talks smack about everyone at the Keurig machine and plots ways to overthrow the unsuspecting boss. As a result, they turn out to be the worst.
In investing, a company's stock may seem OK because the underlying company seems OK. Take, for instance, the world's largest retailer, Wal-Mart (WMT). Without being a top-flight stock analyst, there are several rudimentary reasons to view Wal-Mart's stock favorably. They include:
-- The company is the world's largest retailer, and gains economies of scale from that position.
-- The company attracts strong executive talent because, well, it's Wal-Mart.
-- The company has a formidable balance sheet that could be used to buy back stock, raise the dividend and fund pet projects that could benefit the future of the company.
-- The company serves a critical purpose in communities across the globe, unlike my choice for the all-time worst stock/company.
-- The company has proven it could ring up huge sales from operating a website.
However, similar to that shiny new employee, Wal-Mart is, in fact, the worst when peeling apart the onion. Here are 10 reasons to back up that claim.
1. Something has happened to question future growth. Wal-Mart will close 154 stores in the U.S. this year, many of which shut their doors on Jan 28. In announcing its first mass store closure program, Wal-Mart signaled to investors: (1) It may be too damn big, and will likely announce more store closures in late 2016; (2) growth opportunities with new stores have largely been tapped out in America.
2. A new store concept fails. As part of its store closure campaign, Wal-Mart shuttered all of its smaller-format Express stores. I remember when Wal-Mart launched this format a few years ago -- it was pitched as a perfect way to take the fight to CVS Health (CVS), Walgreens (WBA) and others that operate smaller stores in urban neighborhoods. They even sold gasoline in a bid to sock it to the local gas station owner! The fact Wal-Mart has been unable to penetrate urban neighborhoods with smaller stores -- which are seeing favorable population shifts -- is disturbing when looking longer term. Target (TGT) is moving far more quickly with its urban store format, while Walgreens plans for U.S. domination following a wave of acquisitions.
3. With new store growth set to cool, all eyes on same-store sales. In the good old days, Wal-Mart had a compelling pitch to prospective investors. First, it could open up a ton of new stores to drive the top line. Second, it offered the best prices in town, therefore fueling solid sales at older locations (known as same-store sales). But that pitch has gone up in flames. For starters, the number of new Wal-Mart store openings is set to slow in coming years while weak-performing stores are closed. Second, Amazon (AMZN) is undercutting Wal-Mart on prices in various merchandise classifications. Hence, same-store sales are likely to stay subdued for as far as the eye can see -- unless the U.S. minimum wage hits $15 an hour by the year 2021 during the start of Donald's Trump's second term as president. (Amazon is part of TheStreet's Growth Seeker portfolio.)
4. Relying on low-income America is risky business. Wal-Mart has consistently proven it's unable to capture higher-income shoppers. That has left the company relying on people using food stamps or those earning barely enough to perhaps put one special item in the basket each week (think a better cut of beef, not a new flat-screen for the bedroom). Unless you believe low-income America is set to rise up over the next 10 years, a bet on Wal-Mart seems foolish ... especially as it's investing a ton to compete with disruptive retailers such as Amazon.
5. The cash cow is secretly sick. Wal-Mart's cash cow -- the giant 150,000-plus-square-foot supercenter -- may have an undetectable disease that will surface negatively in the future. The stores have a sizable amount of unproductive store space in light of the rise of online shopping, population shifts, people trading down in home size and a growing desire to get into a retail store and get the hell out as soon as possible. For example, does Wal-Mart really need to be selling bicycles in all Northeast stores during the winter? Probably not. But what goes in that space? Something has to since Wal-Mart is paying for the space and paying workers (paying them increasingly more, which is problem 10.5) to check stock.
6. The promising new store concept is nothing sexy. Wal-Mart is moving forward with an aggressive rollout of its Neighborhood Markets concept, which resembles a grocery store. From what I can tell, the stores offer nothing one couldn't find in a nearby Kroger (KR) or other supermarkets. Traditional supermarkets have greatly improved their prices, store layouts and food selections. When you can't get excited about a retailer's new store concept, it's not a good thing.
7. A key financial metric is weakening. Wal-Mart's return on invested capital, which measures the return on things such as investments in stores and e-commerce, declined to 12.5% as of Oct. 31 from 13.5% in January 2009. This is alarming in the context of: (1) the company continues to plow money into new stores; (2) the company invests gobs of money to enhance online and mobile capabilities. In plain English, Wal-Mart is saying it's not driving high-enough earnings to warrant the spending it's undertaking. I think the company will be forced to announce some form of global cost-cutting measure to boost its returns. And that belt tightening should start this year with the abolishment of the extravagant annual Wal-Mart shareholder meeting. We do not need a Jamie Foxx serving as emcee for a stockholder meeting of a retailer selling cheap food.
8. Being big is no longer a huge advantage. Wal-Mart has too many physical stores to lower prices so low that it crushes Amazon. As long as Amazon doesn't start developing a retail network, it will continue to become more efficient at what it does, and reinvest savings in lowering merchandise prices. Not welcome news for Wal-Mart.
9. Unlikely to be huge in organics. Wal-Mart has made progress in raising the number of organics it sells. The extent of the progress is unknown, however, as the company doesn't break out recent new products or initiatives. But the reality is that Wal-Mart will only be an interested onlooker in organics because its consumers are too poor to afford an entire basket of the stuff. If Wal-Mart loads up on organics, the product could simply sit on the shelves past their expiry. The fact that Wal-Mart won't be a large player in organic food, which is part of a broader health and wellness movement in the U.S., is an issue.
10. There is a business segment that doesn't need to be a business segment. Wal-Mart execs continue to be wedded to the notion that it should be operating Sam's Club, a membership club. The business has really underperformed Costco (COST) and BJ's Wholesale in recent years -- two clubs that are benefiting from a singular focus on trying to be the best warehouse club around. Wal-Mart needs to shed the lower-profit-margin Sam's Club for the sake of shareholders. Even if it does, though, it would still be the second-worst investment for the nine other reasons listed above. (Walgreens, Target and Costco are part of TheStreet's Action Alerts PLUS portfolio.)