Wal-Mart Bulls Betting on Oil to Light Up Christmas Sales

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As falling gas prices and growing job market afford consumers more spending cash heading into the holidays, investors are positioning for retailers like Wal-Mart Stores Inc. to reap the benefits.

Demand for options that protect against future losses in Wal-Mart shares fell to the lowest level in more than five years relative to bullish ones, data compiled by Bloomberg show. Ownership of put options conveying the right to sell an exchange-traded fund tracking retail stocks has fallen to the lowest since May compared with calls giving the right to buy.

Investors are anticipating that the lowest crude oil prices in four years and the highest consumer confidence since 2007 will boost holiday sales for chain stores. With its focus on shoppers in lower income brackets, Wal-Mart is particularly well-positioned to thrive this holiday season, according to Walter Todd of Greenwood Capital Associates LLC.

“Wal-Mart’s customer base benefits more than anyone from the drop in gasoline,” Todd, who oversees about $1 billion as chief investment officer for Greenwood, South Carolina-based Greenwood Capital Associates, said in a Nov. 17 phone interview. “You’re seeing confidence in the retail sector as a whole increase as gas prices fall. It makes sense that people would be inclined to be positive on the space heading into the holiday season given that backdrop.”

Shopping Season

The National Retail Federation has said holiday spending will rise 4.1 percent this year, beating last year’s 3.1 percent gain. The season is key for retailers, with sales in November and December accounting for about 19 percent of annual revenue, according to the NRF.

Retail shares have already started climbing amid a decline in crude oil prices. The SPDR Standard & Poor’s Retail ETF, which tracks the benchmark gauge’s Retail Select Industry Index, has surged 13 percent since falling to a more than four-month low in October.

Crude oil has slipped 12 percent over the same period. In addition, as of Nov. 20, the national average price of regular gas was down 23 percent from this year’s high, set on April 26, according to the American Automobile Association.

The lower gas prices “should help lower- and middle-income consumers, given the relative role of energy in consumer budgets,” a group Goldman Sachs Group Inc. analysts led by Matthew Fassler wrote in a Nov. 14 note to clients. “Wal-Mart should be a key beneficiary of this dynamic.”

Options Data

Contracts betting that Wal-Mart shares will decline 10 percent cost 4.68 points more than those wagering on a 10 percent increase, according to one-month options data compiled by Bloomberg. The price relationship known as skew fell on Nov. 11 to the lowest level since May 2009. The measure has averaged 7.03 points over the past two years.

Wal-Mart stock has already climbed 12 percent this month, including a 4.7 percent increase on Nov. 13 after the world’s largest retailer posted third-quarter earnings that beat analysts’ estimates after the company paid less in taxes and U.S. same-store sales grew for the first time in seven quarters.

Gains for retailers were also reflected in consumer confidence that rose more than forecast in November to a seven-year high. The Thomson Reuters/University of Michigan preliminary sentiment index increased to 89.4 for the month, exceeding the highest estimate in a Bloomberg survey and touching the strongest since July 2007.

‘Consumer Optimism’

We’ve seen “continued lower gas prices and higher consumer optimism,” Eric Beder, a New York-based analyst at Wunderlich Securities Inc., wrote in a Nov. 18 client note. “The imminent holiday season should compare more favorably than to last year, with a harsh winter that paralyzed much of the industry.”

Still, the holiday shopping season is highly competitive, which has led many retailers to start offering deep holiday discounts earlier than ever before, which can cut into margins, according to Beder.

Wayne Hood, an analyst at BMO Capital Markets, lowered his rating on Wal-Mart to underperform on Nov. 14, citing concern over the company’s long-term earnings-per-share growth potential. Wal-Mart’s sales growth in the third-quarter came at the expense of the company’s profit margins, he said.

Yet options data show investors remain optimistic not just on the share appreciation potential of Wal-Mart, but for the retail sector as a whole. Traders owned 210 bearish contracts on the SPDR retail ETF for every 100 bullish ones as of Nov. 13, the lowest put-call ratio since May. On average this year, the ratio has been 319-to-100.

Employment Numbers

Jobs data has also boosted expectations for holiday sales, according to Terry Morris of National Penn Investors Trust Co. The U.S. unemployment rate decreased to 5.8 percent in October, the lowest in six years, Labor Department figures show. In addition, 214,000 workers were added to payrolls during the month after advancing 256,000 the prior month.

“Employment numbers have certainly improved, and that bodes well for more people being able to spend more money,” Morris, a senior equity manager who helps oversee about $2.8 billion at Wyomissing, Pennsylvania-based National Penn Investors Trust, said in a Nov. 17 phone interview. “There’s an optimism about the future for the consumer.”