For contrarian investors, there is an opportunity arising from the stock market loving Amazon on its loss and hating Walmart on its win.
In the U.S., investors are used to Amazon AMZN, -0.05% being No. 1 in e-commerce. However, the future growth is in India and China. To the casual investor, it may come as a shock that, despite massive investments and massive losses, Amazon lags far behind in India. India has 1.3 billion people and e-commerce is in its infancy. Therefore, it matters. Flipkart previously bought India’s eBay EBAY, +0.55% site.
Amazon likes to be No. 1. So Amazon’s solution was to attempt to buy Flipkart. However, Amazon was beaten to the punch by a company from home that most of you know for lagging in e-commerce: Walmart WMT, +0.44% Let’s explore this issue with the help of a chart.
Read: Amazon’s market share in India has grown fast in recent years
Chart
Please click here for an annotated chart of Walmart. Please note the following from the chart:
• The chart shows that, initially, the stock market liked the rumor of Walmart buying Flipkart and, as a result, beating Amazon.
• The chart shows a gap down in Walmart stock after Walmart won, owing to the effect on its earnings per share. More on this later.
• The chart shows that, not long ago, the sentiment on Walmart was extremely positive. Extremely positive sentiment is often a contrary indicator. The reason is that anybody who was going to buy would have already bought it and a tiny bit of bad news can send the stock lower. This is exactly what happened to Walmart stock.
• The chart shows that sentiment is now negative. If the sentiment becomes even more negative, it will provide a better buying opportunity even though there is a buying opportunity right now.
• The chart shows the support zone.
• The chart shows that Walmart stock fell on heavy volume. But the volume was not heavy enough. This means that everyone who is likely to sell has not yet sold.
• Relative strength index (RSI) is oversold. Normally this is a buy signal. However, in this case, RSI is not oversold enough.
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Flipkart
Walmart is buying 77% of Flipkart. For the long term, Walmart is making the right decision. However, in the short term, Walmart is making a very expensive acquisition.
Amazon is also investing heavily in India. The stock market likes investments that Amazon is making in India even though Amazon is incurring heavy losses.
When it first became known that Walmart had won the bid for Flipkart, thereby beating Amazon, the stock market liked it. Walmart sees $0.25 to $0.30 per share negative impact to fiscal 2019 earnings from the Flipkart deal. The negative impact in fiscal 2020 will be $0.40 to $0.45 per share. None of that should be a surprise to the market, but the stock gapped down on the earnings hit.
Of note is that the market is rewarding Amazon for making similar investments and incurring big losses in India. But the market is punishing Walmart heavily for doing the same thing.
The reason for the difference is that Amazon and Walmart have different shareholder bases. Amazon shareholders expect Amazon to make investments for the future. In contrast, Walmart investors are more concerned with present-day earnings.
At some point, we will see Walmart’s shareholder demographics change, bringing more opportunity-oriented investors on board. That is a process that will take time.
What to do now
Here is an opportunity for contrarian investors, but the stock must be accumulated in a sophisticated way. To Arora Report subscribers, we provide specific buy zone, target zone, stop zone and proper position sizing. The most important factors for investors in buying Walmart stock are buying in tranches at appropriate times and proper position sizing. Walmart is one of the few blue-chip stocks that has significantly pulled back in this expensive market, and therein lies the opportunity.
200-day moving average
The 200-day moving average is the most popular timing signal. It gets its power not because of anything innate in it, but because legions of investors believe in it. However, trading based on the 200-day moving average is fraught with peril. Recently I wrote, “What you should know about the most popular timing indicator in U.S. stocks.” I have received a large number of emails from investors asking for more examples so that they can learn.
The chart in the linked story above shows the 200-day moving average. Please note the following in this regard:
• The 200-day moving average gave a well-timed buy signal on Walmart stock.
• The sell signal from the 200-day moving average came too late, perhaps at a time when the stock should have been bought on the pullback.
• The chart shows that, before the buy signal that actually worked, the 200-day moving average produced numerous whipsaws. During the whipsaw period, an investor trying to trade on the 200-day moving average would have lost his shirt.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.