Wall Street gives Wal-Mart wage hike thumbs down

Published Fri, Feb 20 20159:00 AM EST

When Wal-Mart announced it would raise the minimum wage for a half-million hourly workers, the reaction from Main Street to Pennsylvania Avenue was universally positive, heralding the company for doing the "right thing." Wall Street likes "sure things," not the right thing. After the largest private employer made the move Thursday morning, its shares cratered by 3 percent despite also announcing better-than-expected earnings for last quarter and a higher dividend. And Friday, investment bank Barclays downgraded the stock. In fact, 14 analysts published research updates on Wal-Mart since the announcement, according to FactSet, and not one upgraded the stock on the notion the wage hike was a way to improve the long-term success of the company. All of them kept their "neutral" or "hold" ratings, Wall Street's version of "sell," and just about every single one lowered their earnings estimates on the increased labor costs. Margins will compress "driven by the new associate wage structure and training, as well as e-commerce investments," said Barclays, which downgraded the stock to "equal weight" from "overweight." "Most likely the raises will bring an improvement in employee morale, but cynics might point out that the Federal minimum wage was widely anticipated to rise this year anyway." Read More Can this Dow member go from worst to first? MKM Partners said: "We are lowering our recently-lowered EPS estimate from $5.15 to $4.95, mostly to reflect Walmart's decision to raise the lowest wage it pays employees to $9/hr." The research firm has a "neutral" rating. It's rare on Wall Street to ever cheer pay increases as a way to long-term success, despite many examples that show in the retailing world it can be a recipe for sustainable stock gains. Take Starbucks for example. The coffee chain offers health insurance and even tuition assistance to its workers and sees this as key to maintaining a quality service experience at its thousands of stores. The stock has quadrupled over the last five years, topping Wal-Mart's 58 percent gain. And shares of relatively high-paying burger chain Shake Shack doubled on the day of their IPO last month as the CEO of low-wage payer McDonald's stepped down and the shares foundered. To be sure, Wal-Mart's guidance for the year was lower than Wall Street expected, so there were other possible reasons for analysts to be negative and the stock to fall. In the "you're only as good as your last quarter" culture of Wall Street, a long-term change like the new payroll plan didn't have a real chance of a positive review. The Money Play With the near-universal negative reaction to Wal-Mart, the contrarian play would be to buy the shares now. Even though oil prices have been cut in half over the last six months—a great boost to their customers—the shares are up just 11 percent. Still it may be best to stay away until the short-term wage costs are digested by the Street. Guggenheim Securities said to not touch Wal-Mart, but recommended Dollar General , Five Below and Rite Aid largely because they won't have higher labor costs this year. And ironically Wall Street does love Starbucks' stock. Almost 80 percent of the analysts that cover the company say to buy the shares.

An employee in a Walmart store.

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Wall Street likes "sure things," not the right thing.