Betting Big on Wal-Mart

If shopping were an Olympic sport not only would the U.S. take gold, but it would probably be the most watched event of the season. Unfortunately shopping won’t get you to Beijing but retail earnings could be pretty exciting for investors.

Several companies, from Gap and J.C. Penney to teen retailer Hot Topic raised their outlooks last week — with help from strict inventory controls and slashing expenses — even as they reported sales declines in July at established stores.

However it’s bellwether Wal-Mart that investors are most eager to hear from.

In July, Wal-Mart had said that its customers were increasingly unable to stretch their paychecks to the next payday. That cautious tone caused Mark Miller, an analyst at William Blair & Co., to downgrade shares of Wal-Mart to "market perform" from "outperform" based on expectations for slower sales and profit growth in the second half.

In a note to investors, he said that Wal-Mart's July sales performance was a "material deceleration" from the previous two months. Still, he believes the company is on track to meet or exceed Wall Street's current expectations for second-quarter earnings of 84 cents per share when it reports results on Thursday.

I like Wal-Mart, says Jon Najarian on Fast Money. And the large volume of call buying in this stock would make most investors feel positive. But I don’t think now is the time to buy. The recent upside mainly comes from interest in their dividened (not from stronger-than-anticipated sales.)

However, I see real optimism in both Home Depot and Lowe’s , Najarian adds. There’s very strong call buying in Home Depot. And I’ve noticed positive institutional buying in Lowe’s. The retailer I don’t like is JC Penney, he adds, I see put buying that appears to be negative.

Retail is a suckers game right now, adds Jeff Macke. If you must trade retail I don’t think Wal-Mart will do anything to break down and Costco seems to work higher no matter what.


The Bottom Line: Don’t misinterpret the positive options trading around Wal-Mart. It speaks to the dividend more than anything else.

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Trader disclosure: On Aug 12, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Macke Owns (WMT), (COST), (MSFT), (UUP), Macke Is Short (TM); Adami Owns (AGU), (C), (BTU), (GS), (INTC), (NUE), (MSFT); Pete Najarian Owns (AAPL), (NVDA), (TSO), (AMLN), (HD); Pete Najarian Owns (CSCO) Calls; Finerman Owns (GS); Finerman's Firm Owns (GLNG), (JCP), (MSFT), (SUN), (TSO), (VLO); Finerman's Firm Is Short (WB), (XLF), (BBT), (COF), (IYR), (MDY), (SPY), (IWM), (IJR); Finerman's Firm Is Short British Pound; Finerman's Firm And Finerman Own (PDE); Finerman's Firm And Finerman Own (C) Leaps

Jon Najarian Owns (LOW) Calls