ICYMI: Why Leading Retailers' Valuations Look "Scarier" Than Nvidia's

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2:06With our unified Team Michigan approach, businesses scale faster and compete at the highest level. Michigan, pure opportunity. Seize your opportunity at michiganbusiness.org. Bloomberg Audio Studios. Podcasts. Radio. News. You're listening to Bloomberg Businessweek with Carol Masser and Tim Stenevek on Bloomberg Radio. NVIDIA may be the star of the show today, but two stocks look scarier, Costco and Walmart. In his latest column, we have Jonathan Levin of Bloomberg Opinion explaining why both stocks represent a higher risk due to their valuation and their perception of safety. So Jonathan joins us from the Miami Bureau of Bloomberg.

2:50Jonathan, thanks for joining us. So what gives? Tell us about how and why we got here.

2:57Jonathan Levin:Hi, Isabel and Tim. Yeah, I wanted to write about this because anytime you talk about S &P 500 valuations, the first thing that anybody says is like, yeah, but it's almost all these AI plays, yada, yada. And they have this extraordinary growth runway. that's all like a decent argument in my view. But there are all these other stocks that are kind of in humdrum industries that are much harder to explain away. And the obvious ones here, I think, are Costco and Walmart. And so in my column, I sort of walk through how they got to these extraordinary forward P ratios, which are actually technically richer than NVIDIA itself.

3:44Jonathan Levin:And I land on this idea that these are companies that have long been perceived as all-weather stocks. They are stocks that tend to perform both on a fundamental and market basis in good times and bad, right? The economy is humming. Costco and Walmart are doing great. The economy is doing not so well. They're grabbing market share from others. But the problem is when you latch onto this narrative of safety and you push valuations higher and higher, we're now like three standard deviations above normal for Walmart and close to two standard deviations above normal for Costco. When you do this, this thing that you decided to invest in because you thought it was safe is suddenly not really so safe anymore.

4:37So that's my argument. So let's go through some of these numbers here. It's a solid argument in my view, not just because you're my colleague, Jonathan, but I think this makes a lot of sense. I'll take it. Walmart and Costco, you're right, actually trade at richer blended forward price earnings ratios 34.3 times and 47 times respectively than NVIDIA, which trades at 34 times. And the situation is getting less tenable with time. The multiple at Walmart is about 3.3 standard deviations, as you mentioned, an average of 20. And Costco trades at 1.7 above its 10-year average of 34. So what do you think is giving the perception that these two companies are good buys, that they are safer in an environment where if we see a stumble in the economy, yes, people are still going to go to Costco and they're still going to go to Walmart.

5:29That's the whole idea with this type of trade.

5:33Jonathan Levin:Yeah, that's the story. I would say what made these stocks really, really great stories over the past three to four years is the fact that they are so safe, but they have also delivered a pretty impressive upside. And the story is that like we've been in a good but not great economy. So there's been sort of some belt tightening, but the economy has never gotten so bad that people have started to suffer layoffs and that sort of thing. That is like the sweet spot for these companies. Like consumer demand is still there, but people are looking for ways to save some money. It's a sweet spot, but bear in mind, It is not a sweet spot that lasts forever.

6:20Jonathan Levin:The other thing that you can say is, specifically in the case of Walmart, they've sort of inflected to a little bit more of an e-commerce play. So that's another argument that you hear pretty commonly. You should be slapping an e-commerce multiple on this company rather than like a big box retailer multiple. But the problem with all of these arguments, in my opinion, is these companies are already massive. They have massive, massive footprints. And in the in the not so decent past, you would have thought, geez, they're so big that they can't really grow top line like much faster than the economy itself.

6:59Jonathan Levin:And at some point, we're going to settle back into that reality. They just can't grow aggregate demand to the sky. And that's also sort of the heart of the reason why I allude to this idea that in some ways, they're more dangerous than NVIDIA. Like, at least with an Nvidia, you can plausibly tell the story that they're going to grow the top line a kajillion percent over the next five or 10 years. And, you know, maybe it's hard to argue with those people. Let's be honest. It's, you know, whatever fairy tale you can tell. But with Walmart and Costco, you can only tell so much of a so much of a fairy tale.

7:45Jonathan Levin:As I said, they are simply hemmed in by the size of the US economy and the international markets where they operate. The sky is very much not the limit. And so at a certain point, you have to return to kind of first principles and say, geez, these companies are trading at stingier earnings yields than like a two-year Treasury note. Does that make sense? Yeah, no, Jonathan, this is this is why your story, your column is one of the most read on the Bloomberg terminal today. Before we let you go, we're not going to let you get out of here without talking about your column from yesterday about Fed Chair Jay Powell, about what you believe he should do when it comes to the situation with the allegations against Fed Governor Lisa Cook.

8:36We did hear from the Federal Reserve yesterday. The Federal Reserve said via a spokesperson in a statement, as always, the Federal Reserve will abide by any court decision. You argue in your piece that Jay Powell needs to address this personally and head on. Why?

8:56Jonathan Levin:Yeah, exactly. Well, first and foremost, you know, I understand why Jay Powell has done things the way he has up until this point. There's there's don't get anywhere by trying to go like tit for tat with a bully. And Jay Powell has been a survivor, right? Jay Powell survived the first Trump administration, and he did so by sort of keeping his head down and turning the other cheek. However, at this point, the Fed is losing credibility by letting Donald Trump suck up all the oxygen in the room, by letting him dominate the conversation. And you are not going to save Fed credibility by keeping your head down, focusing on the macro outlook and putting putting out like a tersely worded press release when Donald Trump is on truth social and on television every single day, actively through his rhetoric right now, already undermining the public's the public's faith in the federal reserve.

10:05Jonathan Levin:And so, yeah, I would like to see J-PAL out there making his case for why, over decades and decades, central banks around the world have decided that this is a good arrangement for the citizens of their countries. This is an arrangement that empirically delivers the best macroeconomic outcomes, the lowest sustainable inflation, and as such, the most sustainable growth trajectories. You also cite the Nixon era Fed as a cautionary tale. Can you talk to us about the serious long-term economic dangers when Americans think, or if Americans think, and begin to doubt the Fed's ability to make politically independent decisions?

10:54Jonathan Levin:yeah exactly i mean this is in this is in the history uh this is this is not at all theoretical i mean we've heard this story many times but uh you know the 70s inflation was caused by a lot of things it was caused by some energy shocks a very very strong argument that it wouldn't have sat around uh and festered and become a decade-long problem that volker had to had to crush with a serious, deep recession if Nixon had not pressured the Federal Reserve to keep policy unduly easy in the early 1970s for political purposes. And so we know now, and we know through the examples of other central banks around the world, that that is dangerous.

11:43Jonathan Levin:And it is plausible. It is plausible. And I think you see this in the markets that Donald Trump could run the economy hot for a few years and see minimal consequences. Maybe he would benefit from that politically. Maybe Republicans as a party would benefit from that politically. But in the end, sorry, go on. Well, I was just going to say, why are you convinced that it would be possible to run the economy hot for a couple of years with minimal consequences when we saw the Biden administration do that in the wake of COVID? And the consequences showed up pretty quickly. Yeah, that's an excellent point.

12:23Jonathan Levin:Fair point. And you don't play with fire. I would say there is another scenario in which Trump could get away with running the economy hot. Maybe not red hot, but hot. Bear in mind that supply chains coupled with stimulus was what really caused the inflation of 2021 and 2022. But I think there's a scenario in which Trump gets away with this for a while. But what I want people to take away from this is you don't get away from this. You don't get away with this forever. Nobody gets away with this forever. And so it can be good in the near term for somebody's political fortunes, but it's never good for the American people.

13:07Jonathan Levin, check out his columns. No easy way to tie them together. Costco, Walmart, NVIDIA. And yes, of course, Jay Powell and the Fed. You can do that on the Bloomberg terminal. You just type in OPIN go on the Bloomberg. Also, you can check it out at Bloomberg.com as well.

13:27When you're running a business, the best days are the ones where priorities stay on track. For midsize and large companies, risk can affect multiple parts of the organization at once, from property and liability to cyber and regulatory challenges. At that level, managing risk becomes an ongoing discipline. At the Hartford, the focus is on helping businesses manage risk before it turns into something more disruptive. And when losses do happen, that work is paired with insurance coverage shaped by years of underwriting, risk engineering, and claims experience. Learn more at thehartford.com slash risk mitigation.

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