The World's Greatest Pairs Trade (Short Amazon, Long Walmart)

Long Walmart, Short Amazon

These two companies have some similarities, they are both major retailers and have market caps around $200 Billion. After that the vast differences between the companies emerge. One trades at a P/E of 14 and the other around 900. One is forecast to make an operating profit of $31 million in Q2 2015, the other $5.8 billion. One has a 3% dividend yield while the other has none.

Why Amazon Has Moved

Amazon is the perfect example of the current market's misunderstanding of income vs capital gains. Income is real wealth that an investor can retain and use elsewhere. Capital gains are not income. Capital gains are only realized by the marginal seller. Therefore it is not true wealth until it is sold. Although many people believe that holding their AMZN stock has made them rich; they will also believe that it caused them to be broke when it finally reverts to its true value.

AMNZ is experiencing a reflexive loop of investors watching the share price rise while misinterpreting this as income and wealth. This misinterpretation drives investors to continue to buy the stock driving the price even higher. Soros, the founder the theory of reflexivity, was heavily invested in AMZN through 2015. This further demonstrates that the move in AMZN is driven by investor emotions and not by fundamentals. The capital gains earned holding AMZN are not real wealth. I reiterate, these gains will only be earned by the marginal seller. Once Soros begins to sell, the market will take notice and the price will move away showing the impact of even his marginal selling destroys much of the "wealth" people believe they hold in AMZN stock.


The crash in WMT stock price in October proved to be the perfect entry point for this company. I personally got long just below $58. That fall in share price was completely unjustified. The announcement of a quantified impact of the minimum pay rate to employees should have had minimal impact on the share price. The information about pay raises was public information that was available long before this announcement. Any half decent analyst should have been able to calculate something close to the cost impacts long before WMT announced the quantified number. The share price fall on that announcement was just the lemmings running off the cliff to their timely end.

Macro Drivers

Now I'm sure everyone here can project a DCF and back into the current market price by adjusting the growth and cost drivers in their model. Sadly, I believe this is what most of wall street has reverted to in fear of making bold calls that could be wrong. It is much safer for an analyst just to stick with the crowd and if they do have a view, only express it by being on the outer band of consensus estimates. But regardless of these issues, I would like to provide some ideas on adjustments to the drivers in your models based on future macro changes that could have significant impacts on your resulting valuation calculations.

$$$ USD Bull Market

I personally believe we are still in the beginning of a multi-year dollar bull market. The 9.5 TRILLION USD carry trade short in the FX markets will continue to unwind and strengthen the USD as people continue to buy to hedge their positions. This is the beauty of short gamma market covering.

But how does this benefit WMT? Margin expansion. WMT's primary costs are in terms of foreign currencies while the majority of their sales are in terms of USD. This means that their inventory will be cheaper to purchase in weaker currencies and then their sales will be relatively greater in terms of USD. The net result is higher profit margins.

Lower Oil For Longer

This recent oil boom and bust has paralleled the internet infrastructure boom and bust. In the late 90s an excessive amount of fiber optic cable was laid by highly leveraged companies. In the bust these companies where bought for pennies on the dollar and the crushing weight of the debt was gone. This allowed internet to be cheap for everyone since. I believe the same thing is happening in the energy markets. As these overly leveraged oil firms go bust and massive haircuts are experienced on the debt, you should see oil be cheap for longer. I project that the long end of the oil futures curve is going to flatten and fall off substantially.

Once again this is hugely beneficial to WMT. As one of the most efficient supply chain managers in the world, one must expect that Walmart will capitalize on this opportunity. These lower oil prices will lead to even greater margin expansion as WMT's distribution costs drastically shrink.

In conclusion, I believe that AMZN's growth expectation are very unreasonable and that share prices should reflect this as time progresses. Furthermore, I believe that these two major macro events are going to lead to huge margin expansion opportunities for WMT that AMZN will not experience.