Is Wal-Mart Stock Peaking?

For years, Warren Buffett's investment in Wal-Mart (WMT) looked like a blunder. The legendary investor and chief executive of Berkshire Hathaway (BRKA) bought almost 20 million shares in the world's largest retailer in 2005 and spent three years watching that $944 million investment go almost nowhere.

Now, Buffett's patience is paying off. Wal-Mart's stock recently hit a four-year high, providing Buffett a 22% return.

But how much further can Wal-Mart shares keep rising? While the stock looked like a bargain to value investors like Buffett in recent years, it's starting to look a lot more pricey lately.

Testing Value Investors

Compared with the broader stock market, Wal-Mart's stock performance has been tremendous. While the Standard & Poor's 500-stock index has tumbled almost 9% so far this year, Wal-Mart shares rose 21%.

Patrick Becker Jr., a value manager at Becker Capital Management, bought Wal-Mart stock in 2006, when it was "fairly cheap," but he now says, "We don't think it's expensive, and we don't think it's cheap." Craig Hardy, manager of the Huntington Income Equity Fund (HIEFX) says the stock is "probably fairly valued."

Both those managers said they still hold Wal-Mart stock, but Chris Trompeter of Tradition Capital Management, says he sold most Wal-Mart holdings in May.

"We can like the company but not necessarily like the stock price," Trompeter says. "That's where we are right now. We needed the money for other stocks we thought were more compelling."

Investors use a variety of methods to determine the "correct" value of a stock, with the price-earnings ratio a common shorthand. With a p-e of 18 based on earnings from the past 12 months, Wal-Mart is at its highest valuation in three years, a price that is scraping against many value-oriented investors' upper limit.

(Rival Target (TGT) has a p-e of above 15. J.C. Penney (JCP) has a p-e of less than 9.)

Wal-Mart's Recipe in Tough Times

Al Meyers, portfolio manager of AMBS Investment Counsel, says he might be forced to sell his Wal-Mart stock soon according to his investment criteria. "They've got to deliver [higher] earnings or it's going to be difficult to justify owning the stock," he says.

Many on Wall Street are betting Wal-Mart will keep beating expectations. The tough economy and high gas prices have made things hard for almost everyone, including most retailers and the U.S. consumer.

But Wal-Mart has arguably succeeded because of the tough times: Others' pain is Wal-Mart's gain. Wal-Mart seems to have attracted U.S. consumers not only with its reputation for low prices, but also with its wide selection, which allows customers to save fuel by making one big shopping trip at a Wal-Mart superstore rather than several trips to other stores.

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