A few weeks ago I spoke about “dead money” stocks that have been trading flat over the past decade. The reason they have traded flat for so long is that their valuations in 2000 were ridiculously high. Whenever you invest in blue chips at 25-30 times earnings, you can expect your investment to remain flat over the long haul. Now, however, these blue chips are finally trading at valuations that value investors love.
“Complain all you want to about [Wal Mart] going nowhere since 2001, but don’t blame the company — it’s done its part. The $15.5 billion the world’s largest retailer earned in the past four quarters completely trounces the $6.4 billion in profits this discount chain cleared in the same four quarters ending in the middle of 2001. In fact, only once in that 10 year timeframe has trailing 12-month revenue fallen (mid-2009), and it’s more than made up for the dip since then.
“At the heart of Wal-Mart’s success is the pricing power that comes with sheer size. It’s the world’s largest retailer, and as such, it’s also the world’s biggest single wholesale buyer of everything from toys to food to apparel. Therefore, it can afford to call the shots as a buyer, and it can afford to beat its competitions’ prices — or even take a loss — as a seller.
“So why has the stock been stagnant? Because investors ran it up to 45 times its annual earnings in 2000, which was a valuation the company never had a prayer of justifying anytime in the foreseeable future. The stock is now priced at a palatable 12.6 times its trailing 12-month earnings now though, so we may finally be at the point where shares and profits start to move in tandem again.”