Recession poses challenges for new Wal-Mart chief
Change is in the air these days, and Wal-Mart (NYSE: WMT) recently announced that CEO H. Lee Scott, who has led the company for almost nine years, plans to retire. With Wal-Mart firing on all cylinders lately, Scott is leaving while it’s on a roll.
He departs on Feb. 1, when the company’s fiscal year ends. His replacement, Mike Duke, currently CEO of Wal-Mart’s international segment, is coming in at an interesting time. Although Wal-Mart has been a bright spot in these tough economic times, it recently indicated that it may not be bulletproof – or recession-proof – as consumers struggle with their budgets.
Meanwhile, although it’s been much easier to lure customers focused on cost-cutting these days, one can only hope Wal-Mart won’t lose sight of the importance of protecting its brand while not seeming to do its business in a thuggish manner, which has often been a problem in the past. Plus, with the new Democratic administration coming in, an increase in the power and influence of unions could present a challenge for Wal-Mart.
If Wal-Mart can continue to make good changes (it recently announced plans to use wind power to power some stores, for example), any market share it steals during the recession might stick.
Ask the Fool
Q: What’s a “pair trade”? – R.K., Fairfield, Calif.
A: It’s the practice of making two related trades at the same time. One is a “long” position (i.e., buying a stock with the expectation that it will increase in value) and the other a “short” position (where you borrow and sell a stock you expect will fall, planning to buy it back later at a lower price). The two securities will have a strong relation to each other.
For example, when the price of oil recently began falling, some people expected gold to rise. If so, they may have done some pair trading, buying gold-related securities and shorting oil-related ones.
Q: What’s a company’s “burn rate”? – W.G., Decatur, Ill.
A: It refers to how quickly the company is burning through cash. This isn’t often an issue for large, established companies, but with small and quickly growing ones, a glance at the burn rate can be valuable. The number to examine is free cash flow, which is income from operations, less capital expenditures.
For example, imagine that in its most recent quarterly report, the Meteorite Insurance Co. (ticker: HEDSUP) reported negative $20 million in free cash flow, as its cash balance fell to $80 million from $100 million in the previous quarter. It’s not unusual for firms to lose money in their early years, but it’s also what puts many of them out of business. In HEDSUP’s case, at its current burn rate, it’ll use up its cash in just a few quarters. To stay alive, it will have to reduce spending (possibly resulting in slower growth) or find some more money (perhaps taking on debt or issuing additional stock, diluting value for existing shareholders).
My smartest investment
Years ago I bought 400 shares of Telefonos de Mexico for $1 per share on the recommendation of John Templeton. It was soon worth less than a dime per share and wasn’t worth selling, so I hung on. In a retooling of shares, I ended up with 140. As Mexico’s economy improved, so did the company. My shares are now worth about $13,000, and I’ve received far more than my original investment in dividends alone. It just took a little patience. – Robert P., Landis, N.C.
The Fool responds: It’s been nearly a decade since you sent us this story – but it contains a lesson that bears repeating. And if you’re still hanging on to your shares, they’ve more than doubled since then. Patience is indeed a critical quality of great investors. As Sir John himself urged: “Invest – don’t trade or speculate. The stock market is not a casino, but if you move in and out of stocks every time they move a point or two, or if you continually sell short, or deal only in options or trade in futures, the market will be your casino. And, like most gamblers, you may lose eventually – or frequently.”