1 Stock to Buy, 1 Stock to Sell This Week: Walmart, Target

Wall Street's main indices ended mostly lower on Friday, after hotter-than-expected wholesale inflation data fueled expectations that the Federal Reserve will keep interest rates higher for longer.

For the week, the benchmark S&P 500 and technology-heavy Nasdaq Composite fell 0.3% and 1.9%, respectively, with both recording a second straight weekly decline. The small-cap Russell 2000 lost 1.6%.

The blue-chip Dow Jones Industrial Average was the outlier of the major averages, rising 0.6% on the week.

Next week is expected to be another eventful one as investors continue to gauge the outlook for the economy, inflation, and interest rates.

On the economic calendar, most important will be Tuesday’s U.S. retail sales report for July, with economists estimating a headline increase of +0.4% after spending rose +0.2% during the prior month.

Meanwhile, the release of the Fed minutes on Wednesday will also be watched closely for any clues on the outlook for monetary policy. Currently, financial markets are pricing in just a 10% chance of a 25 basis point rate hike at the next policy meeting in September, according to Investing.com’s Fed Rate Monitor Tool.

Elsewhere, on the earnings docket, there are just a handful of corporate results due, including Home Depot (NYSE:HD), TJX Companies (NYSE:TJX), Ross Stores (NASDAQ:ROST), Cisco (NASDAQ:CSCO), Palo Alto Networks (NASDAQ:PANW), Applied Materials (NASDAQ:AMAT), and Deere (NYSE:DE).

Regardless of which direction the market goes next week, below I highlight one stock likely to be in demand and another which could see fresh downside.

Remember though, my timeframe is just for the week ahead, August 14 - August 18.

Stock To Buy: Walmart

After closing at a new all-time high on Friday, I expect Walmart's (NYSE:WMT) stock to outperform in the week ahead as the retail giant’s second quarter earnings will easily top estimates in my view, thanks to favorable consumer demand trends.

Despite a challenging environment for retailers, I believe Walmart is poised to deliver a better-than-expected print and provide upbeat guidance as it continues to benefit from ongoing changes in consumer behavior due to lingering inflationary pressures that are causing disposable income to shrink.

The Bentonville, Arkansas-based discount retailer - which operates more than 5,000 stores across the U.S. - is scheduled to deliver its Q2 update before the U.S. market opens on Thursday, August 17 at 7:10AM ET.

According to the options market, traders are pricing in a swing of around 4% in either direction for WMT stock following the report.

Walmart is expected to post earnings per share of $1.70, dipping 4% from EPS of $1.77 in the year-ago period. Analysts have raised their EPS estimates 17 times in the past 90 days, according to an InvestingPro survey, while 10 of the analysts surveyed downwardly revised their WMT earnings forecast.

Meanwhile, revenue is seen rising 4% annually to $159.0 billion, reflecting strong grocery sales and the increased trade-down among wealthier consumers amid the current economic climate.

Q2 same-store sales - which are expected to climb 4.2% compared to last year - will likely top estimates as U.S. consumers flock to its stores amid the current economic backdrop of persistently high inflation and recession fears.

As such, I believe Walmart CEO Doug McMillon will provide solid guidance for the months ahead as the discount retailer continues to gain market share in the food and grocery business.

Walmart has topped Wall Street’s top line expectations for 13 straight quarters dating back to Q1 2020, while missing profit estimates only twice in that span, demonstrating the strength and resilience of its business.

WMT stock ended Friday’s session at $161.20, its highest closing price on record. At current levels, Walmart has a market cap of $434 billion, making it the world’s most valuable brick-and-mortar retailer and the 15th largest company trading on the U.S. stock exchange.

Year-to-date, Walmart’s stock is up 13.7%, outperforming the 9.1% gain recorded by the SPDR® S&P Retail ETF (NYSE:XRT), which tracks a broad-based, equal-weighted index of U.S. retail companies in the S&P 500.

Stock To Sell: Target

I believe Target (NYSE:TGT) will suffer a difficult week ahead, with shares potentially breaking down to new lows, as the embattled big-box retailer’s latest earnings will likely reveal a sharp slowdown in sales growth due to the negative impact of various headwinds on its business.

Target’s second quarter financial results are due ahead of the opening bell on Wednesday, August 16 at 6:30AM ET and are likely to take a hit from ongoing customer backlash over its controversial policies on social issues such as race and gender.

In May, Target pulled some LGBTQ-themed merchandise linked to Pride Month, citing increased confrontations between shoppers and employees.

The Minneapolis, Minnesota-based company - which is the sixth largest brick-and-mortar retailer in the U.S. - has also been struggling with higher cost pressures and decreasing operating margins as it cuts prices in an ongoing effort to clear unsold inventory from its shelves.

Market participants expect a sizable swing in TGT stock following the update, with a possible implied move of approximately 8% in either direction, according to the options market.

Not surprisingly, an InvestingPro survey of analyst earnings revisions points to worsening pessimism ahead of the retail heavyweight’s Q2 print, with 26 out 30 analysts cutting their EPS estimates in the last three months.

Consensus expectations call for Target to report earnings of $1.43 per share for the June quarter, improving from EPS of $0.39 in the year-ago period, amid easing operating expenses and lower freight and transportation costs on its business.

Meanwhile, revenue is forecast to decline 3% year-over-year to $25.27 billion, driven by weak traffic trends and soft consumer spending on discretionary goods.

Therefore, I believe CEO Brian Cornell will strike a cautious tone in his outlook for the current fiscal year to reflect worries over lingering inflationary pressures and higher interest rates, as well as concerns about a slowing economy.

TGT stock - which sank to a three-year trough of around $125 earlier this summer - closed at $131.05 on Friday. At current valuations, Target has a market cap of $60.5 billion.

Shares have been stuck on a major downtrend since early February and have lagged the year-to-date performance of the broader market by a wide margin, falling 12% in 2023.

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Disclosure: At the time of writing, I am long on the Dow Jones Industrial Average via the SPDR Dow ETF (DIA). I also have a long position on the Energy Select Sector SPDR ETF (NYSE:XLE) and the Health Care Select Sector SPDR ETF (NYSE:XLV). Additionally, I am short on the S&P 500, Nasdaq 100, and Russell 2000 via the ProShares Short S&P 500 ETF (SH), ProShares Short QQQ ETF (PSQ), and ProShares Short Russell 2000 ETF (RWM). I regularly rebalance my portfolio of individual stocks and ETFs based on ongoing risk assessment of both the macroeconomic environment and companies' financials. The views discussed in this article are solely the opinion of the author and should not be taken as investment advice.