The Walmart Bubble

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Recession signals are becoming hard to ignore.

On Monday, JPMorgan economists raised their risk of recession to 40%. Big banks are typically bullish to a fault, so this is noteworthy.

Meanwhile, a recent poll revealed that more than half of Americans have less than $500 in savings.

And Walmart CEO Doug McMillon just made worrying comments about consumer behavior. From his recent speech at the Economic Club of Chicago:

You can see that the money runs out before the month is gone, you can see that people are buying smaller pack sizes at the end of the month

Concerning…

A Bubble in “Defensive” Stocks

In the midst of bad economic data, the stock market continues to trade at ridiculously high valuations.

Earlier this week, we focused on tech stock valuations. Today, let’s switch it up and look at consumer staples. Staples are supposed to be a cheap sector of the market, which in theory should perform well during a recession.

First up, Walmart. Here’s a chart showing Walmart’s P/E ratio since 2010.  P/E is the most popular gauge of valuation, and is simply a ratio between price and earnings per share. Higher is more expensive.

Source: Macrotrends

As you can see, from 2010-2016, Walmart shares traded at a P/E of around 10-12.

Today Walmart trades at a P/E of 36. About 2.5x what I would consider a normal level for a defensive stock. Its dividend yield is a sad 1%.

Here’s another way to look at this valuation. If Walmart paid out 100% of its annual profits in dividends, it would take more than 30 years to get paid back your initial investment. That assumes no growth, but you get the idea. And besides, Walmart is only increasing revenue at about 2% per year in real terms (after accounting for inflation).

Walmart should be a safe, cheap dividend stock. What’s the point of owning it when it’s priced so richly?

Costco is in the same boat, currently trading at a P/E of 54. Both Walmart and Costco are great companies, but why would anyone want to own them at such crazy prices? I don’t get it.

These “defensive” stocks have historically performed well during downturns, but that’s because they were already cheap when the crisis began!

Today they’re priced like high-growth tech stocks. So what’s the point of switching into “defensive” sectors like consumer staples?

In reality they’re just as overpriced as tech stocks, with lower growth.

Where to Turn?

Most of you already know where I’m going with this. That’s right, gold and silver. Sure, precious metals could fall a bit if we enter a recession.

But what happens during recessions? Eventually the Fed prints a ton of money and the government sends out stimulus checks. I fully expect that to happen over the next few years.

This would drive inflation and precious metal prices higher.

I’m buying gold and silver miners today. If we go into recession, we might get an even better window to load up on precious metal stocks, before the Fed starts printing money. So I’ve got some cash tucked away to buy dips, too.

If you’re new to precious metals investing, a good place to start is a broad ETF like GDX. Look at its holdings, and research some of the companies. In no time at all, you’ll start to get a feel for the market.

Be sure to read yesterday’s silver piece, if you haven’t yet. And my friend Sean Ring from The Rude Awakening, also did a writeup on silver today which is excellent.

Look for more coverage on the stock bubble and precious metal miners going forward.

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