This past week I had occasion to discuss straight-line calculations with one of my students. He grasped the idea of being able to ascertain a growth (or depreciation) trend using simple linear equations: f(x)=ax+b but was not so quick to see the flaw in all such calculations: no line can continue forever. I don't think Walmart investors are seeing a down cycle, I think they're seeing Walmart smashing into a ceiling and falling back. Matt Krantz, writing in Two things wrong with Walmart for USA Today reports:
Shares of the nation's biggest retailer are down 19 percent this year---including a 3 percent drop to $69.67 Tuesday after the company reported a disappointing adjusted profit a share of $1.08. That missed expectations by 3.6 percent. But missing earnings forecasts for the second quarter in a row isn't the true problem facing the retailer---at least not in the eyes of investors. Instead, there are two troubling financial developments at the company that investors are keying on declining return on equity and anemic revenue growth.
The question investors must ask themselves is simply this: given the global competitive market and the rise of virtual retailers like Amazon, are cookie cutter brick-and-mortar retailers a sound investment in the 21st century? My guess? No. Krantz continues:
Investors looking for a scorecard on management fixate on return on equity. The measure shows how much profit the company is driving from the money plowed into the business by stock owners. This measure of Walmart's performance has been steadily dropping the past three years, falling from 23 percent in the fiscal year ended Jan. 31, 2013, to 19.8 percent in the past 12 months, says S&P Capital IQ. It's another way to see how the company's isn't driving the profit out of the business that investors had come to expect in years past. If there's a source of many Walmart's woes, it start at the top line. Revenue inched up just 1.1 percent during the past 12 months---the lowest revenue growth at Walmart since the 12 months ended January 2010. And revenue growth has been steadily falling, dropping from 5.8 percent in fiscal 2012.
You simply can't make a silk purse from a sow's ear. Jeff Hess: Have Coffee Will Write.

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