Investing in stocks is all about spotting opportunities -- and seizing them. Too often, however, investors are blind to opportunities, for instance when a company's stock has tumbled or has remained weak for reasons that may have little to do with its business fundamentals. Maybe it's because all the big players already own it as a core stock and are looking elsewhere. Or maybe the stock has become unpopular for some reason.

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Still, investors ought to take a closer look to make sure they're not missing a rare chance to snap up a high-quality stock at depressed levels.

Such a stock is Wal-Mart Stores (WMT) -- the world's biggest retailer, about which it seems everybody has an opinion already.

Wal-Mart is particularly notable now for so far missing out on this year's massive bull rally ("toppy" is the term skeptics use to describe currently exuberant share prices). And by most metrics it appears undervalued.

This Heavyweight Is No Has-Been

The stock this year is down 2.5%, while the Dow is up 19.3% and the Standard & Poor's 500 is up 22.5%. Now at $54 a share, Wal-Mart is trading between its 52-week high of $57.51 (on Jan. 2, 2009) and 52-week low of $46.25 (Feb. 2, 2009).

It's currently trading at 15 times estimated fiscal 2010 earnings, close to a price-earnings ratio of 13, its lowest p-e multiple. That's quite a distance from its p-e of 25 in 2005, when the stock was trading at 61.

But don't make the mistake of thinking that this heavyweight, with a market cap of $209.6 billion, is a has-been. Part of the reason investors have ignored Wal-Mart is the flattish retail sector. They're worried that consumers aren't opening up their wallets. Fierce competition from online retailers, such as Amazon (AMZN), is another concern.

A Good Bet to Exceed Expectations

In case you missed it, though, Wal-Mart surprised analysts with better-than-expected results in the third quarter, quite a significant positive. And it's poised to battle online retailers and expand in that market without impairing its profitability. (More on the online issue in a bit).

It may not be the consensus view among investors, but you can bet that Wal-Mart will outperform and beat analysts' forecasts during the holiday season and through most of next year.

"We believe Wal-Mart is well-positioned to gain market share in an adverse economic environment," says Joseph Agnese, retail analyst at Standard & Poor's, who rates the stock a strong buy. Consumers will continue to trade down from its higher-cost competitors, he argues, and will take advantage of its "one-stop-shopping convenience."

Indeed, in spite of weak consumer spending, Wal-Mart, which operates 7,900 retail units in 15 countries, is doing better than most of its rivals because of its basic and discretionary product offerings, notes Agnese. That means good tidings for sales and earnings. He expects the stock to hit $62 a share in 12 months, based on his projected earnings of $3.61 a share in fiscal 2010 (ending Jan. 30, 2010) on estimated revenues of $409.5 billion. Agnese sees earning of $3.95 a share in fiscal 2011 on sales of $436.3 billion. The stock also pays an attractive dividend yield of 2%.

A Parade of Bulls

Neil Currie, analyst at UBS, raised his price target after the strong third-quarter results to $64 a share from $62, and he boosted his fiscal 2010 earnings projections to $3.63 a share from an earlier $3.59, and his fiscal 2011 estimate to $4 from $3.90. "The outlook for Wal-Mart into 2010 remains bright, particularly as inflation, currency and costs should all improve in the coming quarters," says Currie. He rates the stock a buy (UBS has done banking for Wal-Mart).

Morgan Stanley's Gregory Melich is also a Wal-Mart bull. He says it offers "accelerating sales and earnings into a flattish 2010 sales environment." Rating the stock overweight, he notes that "with deflationary headwinds likely peaking, traffic gains should translate into positive [sales] comparisons by the first quarter of 2010." (Morgan Stanley has done banking for Wal-Mart).

"Wal-Mart's 'Every Day Low Price' strategy will continue to result in higher footfalls [customer traffic], thus driving sales, while better inventory management policy will lead to an improvement in the company's margins," says analyst Ritesh Doshi of First Global Markets. Wal-Mart, says Doshi, is all set to benefit from the coming holiday season.

Role Reversal Online?


With regard to online shopping, Web biggie Amazon may well start worrying about Wal-Mart's penetration of that market. Although Wal-Mart's Internet sales constitute an estimated 0.6% (so far) of total sales, that tiny percentage translates into a big number: an estimated $2.5 billion. That still pales against Amazon's $19.1 billion in 2008 revenue, but you can be sure Wal-Mart's online revenues will grow quickly in the near future.

Indeed, Wal-Mart presents a challenge for the online retailers, including Amazon. Beause of its size and vast resources, Wal-Mart "can invest heavily in online pricing and initially absorb losses on Walmart.com with only a minimal impact on profitability," figures David Strasser, analyst at Janney Capital Markets, who rates the stock a buy, with a 12-month target of $60 a share.

He explains that Wal-Mart can afford to post negative margins on Internet sales because it would hardly dent its overall operating margins. Since Wal-Mart has a history of being aggressive in pushing hard into specific lines, such as toys and electronics, the expectation is that Wal-Mart will also try to dominate online shopping. It intends to invest to make Walmart.com more sophisticated and user-friendly, according to Strasser. Wal-Mart's big clout is in maintaining its price leadership, he adds.

Watch Out for Warren

Jaison T. Blair, senior research analyst at Rochdale Securities, says Wal-Mart's currently depressed stock doesn't reflect the quality of the company's business, such as its high return on investment capital of 14.5%, which is relatively high for the retail industry, and an enduring franchise. "These types of businesses don't get very cheap, so we think this is an attractive entry point," says Blair. His 12-month price target: $65 a share.

It isn't surprising that Warren Buffett's Berkshire Hathaway (BRK.A) in November doubled its stake in Wal-Mart, to 37.8 million shares, which is one of its top-10 holdings. Indeed, it wouldn't be far-fetched to expect value player Buffett, a dedicated long-term investor, to further increase his relatively small 1% stake in Wal-Mart. Players such as Buffett rarely miss an opportunity like this.


Meet Gene Marcial at the World Money Show Orlando, Florida, Feb. 3-6, 2010 at The Gaylord Palms Resort


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