Economic Reality Check with Walmart, Home Depot, Lowe’s Target, and More

Hey everybody, welcome in. Thanks for joining us for our earnings watch party this week. David will be joining us here in just a couple minutes, so I'm gonna go ahead and get us kicked off to start. We got a retail-heavy earnings watch this week. We'll make a new portfolio. This is Earnings Watch Party 8/21. And let's get right to it. If you guys have any questions, comments, anything, definitely go ahead and put those in the chat. I would be glad to answer anything that comes up. So for this week, we've got earnings watch. Let's go Walmart, Home Depot, Lowe's. Let's see what we've got here. We'll start with the Largest first. See lots of yellow, a little bit of orange there, but largest first. We've got the retail giant Walmart. As you can see here, we've got an unattractive rating on Walmart to start with. Got a situation where good earnings, quality of earnings looking attractive, positive economic earnings, an 11% ROIC, which is pretty good across the entire coverage universe. But an expensive stock with that market implied growth appreciation period of greater than 100 years. There's a lot of future growth already priced into Walmart. So we can look at what Google Finance— pull that up and see what Walmart's results looked like and maybe how that juxtaposes with the expectations. I think I saw this was one of Walmart's worst days in years. You can see here down 10% this week. Let's see what Gemini has to say about their stock price movement this week. Again, big movement this week. Stock dropped, slowing comparable sales and subdued future guidance, which would tell us, hey, things aren't going to be as strong as expected. And when you've got a situation where expectations were for almost a tripling of profits from current levels, it creates the perfect sort of storm for a disappointment in the stock price after those earnings. Got a— yeah, Walmart, high earnings report, low.

Yeah, Walmart was a big news crazy move, and you nailed it, Kyle. And the stock was expensive. This was on our focus list and a holding for us for a long time, and then it got expensive and we said, hey, it's not there anymore. I— and I remember before we got in, we were waiting for it to get expensive. getting cheap. And when it went— finally got down, we're like, boom, and we rode and we got out at the right time. So that's a recurring thing here in New Constructs. Because we're able to scan the entire market, we can find the best stocks at any given time. And there are particular times in the market when some super alpha stocks show up every now and then, and we found some of those recently. Stocks so good we couldn't believe it, to be honest. And we just did a training on that yesterday. If you're interested in learning more, you can put something into the chat or email us at support, and we'll— we can share some information about a brand new discovery. In fact, these are stocks I didn't believe existed. They're like the best of two different worlds. We found a long time ago, we did a couple bundles on super stocks and we did some alpha stocks, and we barely had enough stocks to even fill out an offer in either one. And the idea that there could be stocks that met all those criteria at the same time and enough that we could put something together was a surprise. And it's pretty awesome. But the point being that, look, long-term success in the stock market is about being opportunistically smarter than the crowd. It's not just enough to be smarter. You got to know something they don't know. And then you got to be able to act on it before they act on it. And with Walmart, man, all the good stuff was in the bag for a long time. People— it became a crowded trade. I like to joke, in the beginning, Roaring Kitty and all the Bored Apes, in the beginning, they had to crowd into stocks like GameStop and AMC, whatever, total junk stocks. Why? That's all they knew. That's when they started. Then they got around— then I think they were sitting around going, if we're going to drive up a stock, why do it in one that can go bankrupt? Why not do it in one that can't go bankrupt? Why not do it in one that actually looks like a good business? Whoa, there's a good idea. And boom, here we've seen shortly thereafter, we saw a lot of the kind of the blue chip stocks really just get pushed up to be too expensive. And growing retail presence and growing speculation, all that same stuff is true with AI stocks as well. And what that does when the crazy expensive narrative-driven stocks soak up all the capital, you've, we found there are some really good stocks that are completely being overlooked and missed. And Walmart's not one of them.

No, might have been at one point, but correct. We can see we were in Walmart and we closed that out in 2023, mid-2023 there.

So yeah, and you know what, we know that sometimes we're going to give up some upside on a lot of these stocks, but it kind of doesn't matter because we would replace that upside that we might miss in a wild stock like Walmart or Nvidia with a bunch of other stocks where the upside is not speculative, where it's reliable because it's underpriced. I'll take this cheap stuff that I know is more reliable 100 times out of 100 times over, hey, let's just hope it just keeps going up because it's popular now. And that's what we're constantly circulating out of— the stuff that's got expensive and the stuff that got cheap. And we just keep going in the cheap, and that's Look, man, that's the way the masters over time have always said to do it. We just do it with automation and AI and better skill than anybody could ever do it manually.

Yeah, not quite as reliable to bet on something already expensive becoming more expensive.

That's right.

We'll jump down the market cap here. Walmart and Target, comparing the 2 giants here. We got Home Depot and Lowe's, look at them a little bit. But Target, kind of a mixed bag on our overall rating here. You've got positive economic earnings, middle of the road ROIC. The valuation looks a little better here. We've got some very attractive— or not very attractive on the 2-year average free cash flow. Price to equity, okay, again, middle of the road, neutral. A little bit higher market implied growth appreciation period gets that unattractive rating. But that's why you see that neutral. You've got mixed results here. We can see what Target did as well and juxtaposed against specifically Walmart. You see a much different path, 7% up for the week. On sort of the— let's see, what was the results of Target's earnings? Let's get a quick overview here. But we've got a situation where net sales were up, outperformed estimates, earnings outperformed estimates, a situation where they outperformed consensus. Expectations are a little bit lower in the stock. So we saw that 2.7 P/E/B/V with Walmart, 2.1 at Target, still higher than we would normally go with some for like a featured long idea or something that makes it into our model portfolios, but a little bit lower expectations. Target beats on top and bottom line there, and so you can understand why that reaction here is plus 7%. Business is— I think Target feels like we were also— they were a long idea years ago, and it just kept— it was a constant turnaround story. Will they turn it around? Will they fix it? And so I think Target gets— sometimes the ups and downs can be a little bit more, I think, violent, for lack of a better term, because they're always looking for, is this the quarter that they turn it around? We've seen ROIC in this company. I want to say it used to be much higher. Yeah, we had ROIC back in 2022 of 20% and down to 8%, and then it's just flagged along 8%, 8%, 10% here in 2025. And so it's a situation where looking for that next turn in the growth phase for Target. NOPAT margin, same thing as ROIC, big drop in 2023. A little bit of improvement, slowly moving downwards. Invested capital turns, so balance sheet efficiency here also moving down, which contributes to that ROI not really moving up that much higher long term. And you're looking at TTM ROIC of 8.4, same thing as back as 2023. And so it's a bit of a mixed bag on the actual fundamentals of the business, which is why we've got that neutral rating. Let's see, free cash flow here, got Positive free cash flow '22, a couple years of negative free cash flow, back to very positive. This is actually very strong free cash flow here, upwards of $3 billion a year, $3.3 billion in the TTM. And then we can look at the valuation and we can see its economic book value, no growth value, has consistently been below the stock price. There's been a bit of a disconnect growing in the TTM. Stock price is moving while that economic book value is flat to down $2 a share here, but the stock's up big time in that same period. So you've got a situation where expectations for future growth are rising while the actual economic book value of the company is actually falling. So it's getting more expensive and needs to see some more improvement in those profitability metrics to really justify the valuation. David, you're back. I was going to jump into Home Depot and Lowe's next if you wanted to compare the home improvement giants.

Yeah, these guys, we always figure we got to do these guys as a pair because They are the same and, or the same business. And not a lot of new news here with Home Depot. It's a good business, continues to be a good business and continues to be expensive. I think it's one of those sort of quality names that a lot of people have crowded into because it's been such a good business for so long and it makes sense why it's a good business. And they do a great job. They, the operations, the efficiency of this company are really impressive. Which is why we see good marks here in quality of earnings, and we've seen them for a long time. And for a building materials business, this is a really high return on invested capital, I would say, for this kind of a company. But yeah, the market sees it. That's all there is to it. It's Home Depot is a popular stock.

And we might've published it, but also internal discussion on Home Depot would look great if it just fell 25%. But because it's a strong business, the stock price is not going to just crater out of nowhere.

Yeah, no, that's a great point, man. It's similar to what we were saying about Walmart. You'd love to buy the stock at $250 as opposed to $330. In fact, that's one of the benefits of the system. We can go in and say, okay, where should we— where does this thing start to look cheap? I just love to go in and start with economic book value. Let's see here. All right, so the no-growth value of the business is around $168. How much growth do I want to give it? I'd probably want to get down below 200. And then I'd say, oh, now that's a great idea. And that's the threshold and criteria in our approach to all of our long ideas and our focus list long and our most attractive stocks list. And all these companies that we talk about, they're Home Depots back when they were 168, sometimes 100 a share, where they're trading at a significant discount. to their no-growth value. Pretty much everything that comes through our system is a long idea. Certainly, things like super alpha stocks and the ones we were just talking about, these are great companies trading at discounts as opposed to premiums. And that's where I'd always rather be in terms of my investment portfolio because premiums can go down just as likely as they can go up. Discounts tend to go away. as opposed to get worse. And of course, we got to do our diligence to make sure it's not the next RadioShack, in which case the discount is warranted because it's going to— it is going to go to zero. Even RadioShack had some assets they sold off. But you get the idea here, right? For us, we want to get stuff. And like, Home Depot didn't used to be that expensive. It used to be even more profitable. And guess what happens to really profitable businesses?

Competition.

Oh, that guy's making $50 a minute at it selling lemonade on that corner. I'm gonna go set up a stand right next door. I'm happy to make $40. And the next guy comes in and says, I'm gonna make $30. The next guy says, I'm gonna make $20, until everyone's not making a lot of money. That's the way the world works, folks. People don't just sit there and go, you know, that guy's making $50 a minute selling that lemonade. I'm really proud of him. Good for him. I'm just going to stick over here selling PB&J for $5. This is not how the world works. People see opportunity, they go after it. And that's a big part of what Lowe's did. They're in the middle of a big acquisition, but you're getting a neutral rating like Home Depot. Decent business, still pretty expensive stock. 1.5 price to economic book value, whereas Home Depot is up there at 2.0, so it's even more expensive. I'd just rather be in stocks where the expectations for future profits are lower than what I think the company would do, and rather than high. I just— it's a preference, it's a strategy, it's a way of life. Why take excess risk when you don't have to? Buy good risk-reward, sell bad risk-reward. That's what we're doing. And listen, similar with Deere. And by the way, headlines on Home Depot. I think what they found is that they're doing well. They're able to make some money, but the outlook doesn't look so good. The interest rate environment is tough. People aren't moving. People aren't doing as much in the stock market. Frozen housing market headwinds. I think they had a good beat, but I think the stock was flat this week. Walmart's going to try to work on their digital article. I saw a great discussion around the 2 biggest online retailers. Are Amazon's number one and Walmart's number two, and the number three is some company you've never heard of. They're the two most dominant, and Walmart's got to keep making progress in that space because I think that their same store sales are starting to suffer. So this great brick and mortar blueprint—it's finally kind of gotten to the point where maybe it's a bit of a liability as much as an asset. But yeah, with Home Depot, Lowe's, these businesses aren't going to be good forever. At some point, everybody's redone their kitchen or bought a new kitchen, or they're tired of it. It's just. Just can't go on forever. Going for a long time, but with the current interest rate environment and inflation and all these things, like, it's just not as conducive as it once was to growing profits. Deere and Company, just same story, folks. This is where we are in a market where all the popular names are neutral or worse, right? Because people are crowded into the well-known names. It's exactly why we do the work we do on things like Super Alpha Stocks. We're trying to help you find the stocks that everybody's missing. That's it. When people are talking about that stock at the cocktail party, they're not talking about something you already know. They want to get you in on something that nobody else knows. Deere is not one of those. Good company, expensive stock. We've seen this story over and over. Economics of the business, okay. Coming down a little bit. That's not great. Return on invested capital coming down. That's not great. Margins down. Capital turns down. Free cash flow yield down. Free cash flow margin down. Economic book value down. Stock price up. I would say all the good news is priced in, folks. This is when Deere looked good to us down here when the price was below economic book value. That's when I think you want to. But look, then that often means maybe economic book value set it down, which is was the case here. And yeah, you're got to be careful. But yeah, I know Deere is this large manufacturing kind of equipment stuff. This has been popular. It's a derivative AI play. They're helping build the data centers and do all the construction. So I think that's part of what you got here. It's one of those popular stocks. It is not a super alpha stock. I'll tell you that. It's nowhere close.

Yeah, I think we've seen the same in Caterpillar on that kind of adjacent AI build out there.

Exactly. Yeah, Caterpillar and Deere, like Home Depot and Lowe's, but Caterpillar do that almost the same exact profile. Good company, bad stock, very expensive. But Caterpillar up there, what, 3.8 price-to-book value? Deere's 2.5, not as expensive. Caterpillar looks like a slightly significantly better business. 24% return on invested capital versus 14%. Free cash flow yield's about the same. Yeah, wouldn't mess with it. All right, what do I— let's talk about Alibaba because then they have a huge miss. Baba like just almost blow up. Down 6% today, down 3% for the week. So I think it was maybe just Today here, what's the big— what's the takeaway? Explosive growth in AI cloud demand, massive CapEx drag. I think they had a huge 75% year spike in capital expenditures, 45% year in cloud, strong analyst backing and revisions, proprietary AI ecosystem and chip integrations. So they've got a model out there too. The Quen model, they got 3 billion downloads globally. Just another one of these AI models. Folks, AI models grow on trees. They grow on trees. Like, how many of there are? KIMI, DeepSeek, Quen. And look, the value is not in the model. The value is in the data. Everyone's gonna have their own model. Right? Maybe everyone's gonna have their own direct share of a data center or something like that. Right? These things are utilities. for people to do more things. They are not mechanisms long-term for certain individuals to make tons of money. They are improvements to standards of living long-term. Now, Wall Street's going to try to make as much money, and they're making a lot of money trying to suck out as much credit as they can for bringing you AI. But AI in many ways is, is based on the collective efforts of all of our society to, to number one, create the safety and the environment where these companies can do their work. But millions and millions of people, Working on all elements of this AI stack. It's people that have built turbines, people that help develop natural gas pipelines, people that help source natural gas and fossil fuels and electricity and all the things and all these other sources of energy. Not to mention people that help design chips. All this stuff goes in AI. And I think the more revolutionary the technology, the more long-term its benefits accrue Primarily to individuals and consumers. Let's take electricity, right? That's a revolutionary technology. Who makes big bucks on electricity, right? Who's becoming a billionaire on electricity? Nobody. It's a utility. It's priced as a utility. Should be a utility. Should AI be any different? If AI is really that helpful to that many people, should a few super wealthy people have control over it? No, no, not even. Right? This whole idea that there should be an FDA or an FAA or whatever like that for AI, that's just a way for the big AI companies to crowd out the smaller players because they'll be the only ones that can afford to make it through the process because it'll be expensive and time-consuming. Meanwhile, you make no money. So you gotta have a big war chest of capital to be able to eat those losses and to pay for the lobbyists to influence them. That's something we want. Let the best model win. All this stuff about, oh, my AI escaped and attacked another company, or it did cyberattacks on people. I didn't even know it happened. It's so powerful. We can't control it. BS publicity stunt. So that you think their AI is super powerful and you don't realize that AI is very little value if it doesn't have good data. The winners, the real winners in AI are gonna be people that own proprietary datasets and build an AI business around their data. Sovereign, specific to them. That's the model long term, not the big AI model stealing everybody's data and trying to disseminate it out and make money on it. Right? There's been a big problem, like these AI models, the frontier models, foundation models, stealing everybody's data. And profiting from that. That's not the American way. That's not long-term. That's not real profit. That's not great. It's not worth a trillion dollars, Anthropic. No. We'll take this Quinn model and I'll bring it in-house so that it doesn't communicate back to the mothership. It's mine and I'll use it to do work on my data, my proprietary data to help my business. Because by the way, that's how I make money with proprietary data and proprietary process. Alibaba down 7, and this is CapEx. And this is kind of a company, I think, operating or trading more like a real company, which is, oh, by the way, I'm going to be super negatively unprofitable trying to keep up in the AI race. And who knows if we win? I just made a case that none of these big companies will have major profit margins, significant profit margins from AI. And I believe that to be the case. They're all priced as if they're gonna have super profit margins, that they're gonna benefit from AI more than the individuals. Individuals are gonna pay through the nose to have access to this all-powerful, incredible AI. Don't buy it. Don't believe it for a second.

I think we've got a comment in the chat there that hits the nail on the head. Frontier models are a race to the bottom.

They are. They are the beginning of the race to the bottom for everybody. Yes. I believe in that too. And it's gonna move on device. Bring it to me. Why am I gonna share my inference, my intelligence, my— why am I gonna give that to everybody else? I'm gonna just contribute to the public good. Come on, man. This is kind of the fallacy. The, the, the hypocrisy in the OpenAI and Anthropic models is like, oh, we're gonna do so much good for you while we make a lot of money for ourselves and take all your IP. Thank you. And give it to everyone else. Yeah. We're doing good for you though. We really are. We really are. We're doing good for you. You're gonna be the one who benefits while we go for a trillion-dollar valuation and steal all your data. What? Chinese models to the rescue. Thank you, Chinese models. All right, ADI. Let's talk about expensive stocks for a second here. So yeah, this is neutral economics, super expensive, 5.8 price to economic book value. That's bigger than Nvidia. That's a lot, folks. That's a really high— that's why we're red. Good business, expensive stock. Record earnings beat. But the stock is down 4.6%. First ever $4 billion revenue quarter, big jump in demand, operating margins better, specialized focus on AI power delivery and optical networking. But stock's down 5%. Why? Price for perfection. Not even close to the kind of earnings required just for the stock price. And I think for those of you that think that this kind of Incredible demand and growth is gonna go into perpetuity. I question that. I really do. I, I don't really notice. People say there's all this backup backlog demand for AI. I don't hear anybody talk. No one I run into is like, yeah, I can't get Claude. It just didn't work today. Couldn't do anything on Gemini or OpenAI because they were just too busy. It did happen on Grok. Grok's like, oh, I'm busy right now. You're gonna have to pay me. I'm like, okay, I'm switching to Gemini. And OpenAI and Claude can't afford to tell you no because they need that utilization number in order to try to get this IPO done. So yeah, I just, I'm sure there's going to be demand and the cloud stuff and all that stuff is growing just as it has been. But this incredible huge amount of demand that warrants all this absurd amount of CapEx for forever, I just, I don't know, man. I don't see it. Somebody do. Somebody help me out there and Give me the counterargument.

I'd love to hear it.

All right. Did we get, did we cover everything here, Kyle? I think we did.

Yeah, I think that's it.

We got one in request here for Roger AAP.

See some green on the screen.

Finally, look at that. One of the, one of our clients comes in and has to give us a good stock. And thanks to everybody else, Roger's willing to share his IP with you guys. Yeah. Advanced Auto Parts. We're about to get a new filing, so we're suspended until I think it means it should be like any day now. Yeah, it was expected yesterday, so probably came in last night. Probably be— this will be updated later, but yeah, looks cheap. This is one of those stocks— this is featured in the Safest Dividend Yields portfolio. What's its sister stock, Kyle, that we did see?

AutoZone.

AutoZone. Yeah, AutoZone was a great long idea for a long time, but it got expensive. I don't remember— we've looked at Advance Auto Parts. It's looking pretty inexpensive here. And maybe this is Roger trying to suggest that we make this a long idea. That's happened before. Worth considering. All right, folks, we're at 30 minutes. Thank you very much for being with us today. If you want to know more about the, the super alpha stocks, get in touch. We're happy to share that information with you and have a great weekend. Thank you.

Thank you.