Beware the Wal-Mart supplier index

Those were the words of advice of this stock market guru about the FocusShares ISE Revere Wal-Mart Supplier Index Fund, who said that the recent reality of the indexed stock prices of Wal-Mart suppliers outperforming Wal-Mart's own stock might be misleading. It brings to mind a recurring question; do produce suppliers who derive much of their business from Wal-Mart better or worse off than other suppliers? The more apt question, perhaps, is, "Are they better off than Wal-Mart?" The above chart show an index (blue line) of 30 Wal-Mart suppliers (sorry, no list provided) who derive a substantial part of their business from WM, compared with the stock price of Wal-Mart (red line). But don't be fooled, says our stock guru.


Writes the skeptical Roger Nusbaum:

A backtest of the fund's performance sThe first sentence on the WSI web page pitching the fund asks if you have ever gone into a Wal-Mart (WMT - Cramer's Take - Stockpickr - Rating) and wonders if you could somehow buy the companies that generate most of their sales selling to Wal-Marthows the suppliers have done much better than Wal-Mart's common stock from July 2002 through July 2007. Before jumping to any conclusion about what might happen in the future, however, it is important to understand some of the market dynamics during that period.

We are coming off of a multi-year run in which small-cap stocks have wildly outperformed mega-caps like Wal-Mart. Although mega-caps have generally done better this year, Wal-Mart has struggled as Wall Street tries to sort out just how vulnerable the company is to higher gas prices.

Later......

We're always hearing that Wal-Mart's size allows it to demand better pricing. Consider the plight of Cal-Maine Foods (CALM - Cramer's Take - Stockpickr - Rating): It gets 36% of its revenue from Wal-Mart, so if Wal-Mart tells the company to lower its prices by 3%, it might be very difficult to say no.

It strikes me that the relationship between Wal-Mart and its suppliers could be testy at times. Too much reliance on a single customer is often cited as a reason to sell a stock, not buy it. WSI may turn out to be a great product, but for now I am very skeptical.