Is it too late to buy the top performing Dow stock?

Key points

• Walmart stock is up 43% YTD, making it the top performer on the Dow.

• Walmart has been remarkably resilient, especially in more challenging economic environments.

• Its valuation has crept up, so is it too late to buy Walmart stock?

Walmart has been the top performing stock on the Dow Jones Industrial Average this year. How much run does it have left?

The Dow Jones Industrial Average is generally considered to be the index that best represents the U.S. economy, as its 30 stocks are picked from across the sectors to best reflect the larger economy.

That has generally been the case again this year, as the Dow has only returned about 8%, well short of the S&P 500 and the Nasdaq, which are up about 17% and 18%, respectively, this year.

Those indexes are heavily weighted by the largest stocks and don’t always accurately reflect the current market or economy like the Dow does, with its solid, yet unspectacular performance, much like the U.S. economy.

That is all a preamble for the top performer on the Dow this year, Walmart (NYSE:WMT), the nation’s largest retailer. Retail stocks have performed well in general, but Walmart, whose discount pricing is attracting customers from various income levels, has led the way. Walmart stock is up 43% on the year, which is the best among the Dow 30.

After such a great run, is it too late now to buy Walmart stock?

Walmart makes gains with higher-income shoppers

Walmart is coming off of a strong second quarter, where revenue rose 5% and adjusted earnings increased 10%, year over year. Both of these results topped earnings estimates.

The retailer saw same store sales rise 4.2% in the U.S. while its ecommerce division enjoyed a 22% boost in revenue. In addition, the company’s advertising arm, Walmart Connect saw advertising sales rise 30% year over year.

One key to Walmart’s success has been its ability to reduce inventory by nearly 3% in the U.S., which has helped keep expenses in check and improve efficiency. Also, the focus on value and convenience has resonated with a broader range of shoppers.

Walmart has always targeted lower- and middle-income customers with its discounted pricing, but in the past year the company has seen significant growth among higher-income households with its value proposition in a still high inflation environment. The company is also seeing sharp growth among Millennials and Gen Z.

“Value matters to everyone, whether you’re above or below 100,000 in income,” Walmart CEO Doug McMillon said on the latest earnings call. “And as it relates to higher-income people, they can buy more discretionary goods and they can pay more for convenience, and we’re offering all of it. So, you know, I think our future looks like it’s got a spread across income levels that’s different than our past because of convenience.”

McMillon added that the growth in the Walmart+ membership program, the store remodels, as well as the gains in delivery and ecommerce should make Walmart a good value to upper-income consumers, regardless of the economy.

Is it too late to buy Walmart stock?

Walmart stock is up 43% YTD, and it has generally performed well in times of lower economic growth and high inflation. It has been remarkably consistent over the years, even during the worst market downturns.

In 2022, for example, Walmart was only down 2% while the S&P 500 was off 19% and the Nasdaq down 33%. It was the worst year since 2008, when the S&P fell 38% and the Nasdaq plummeted 42%. That year, Walmart stock was up 20%.

Over the past 10 years, Walmart stock has recorded an average annualized return of 11.6% while its five-year annualized return is 15.1%.

Currently, the stock is trading at $75 per share and it has a trailing P/E ratio of 39 and a forward P/E of 31. Both are on the high side for Walmart.

The good news is that Walmart raised its guidance for the second half of the fiscal year, expecting modest revenue and earnings gains.

As the valuation might be a bit high, particularly after a post-earnings bump, it might be better to wait for a dip to buy.

But overall, Walmart is one of the best defensive stocks you can own, providing good, reliable returns, particularly when the market zags.