​The case for investing in Amazon and Walmart

Not only the stock market's volatility but concern about earnings and other business fundamentals helped clobber the shares of the nation's two giant retailers -- Amazon (AMZN) and Walmart Stores (WMT).

Both stocks have suffered this year, with Amazon plunging to $529 a share on Feb. 17, 2016, from more than $600 in early January, and way below its 52-year high of $696.44. It closed Friday at $534.90. And Walmart has tumbled to $64, off from $68 on Feb. 1 but way down from its 52-week high of $84.86. Little wonder that Wall Street is getting a bit edgy over these behemoths.

"It's tough to get constructive on Walmart, given the deflationary headwind expected in 2016," said Charles Grom, analyst at investment firm Sterne Agee, who rates the stock as "neutral," with a price target of $58 a share. Although he praised the measures CEO Doug McMillon is taking to reenergize Walmart's operations, Grom worries that it will take years for the corrective steps to bear fruit.

One million Walmart workers are getting a raise

He also expressed concern that with 56 percent of Walmart's revenue coming from grocery sales amid negative food CPI trends during the quarter, it would be difficult to expect significant upside to its comparative same-store sales guidance despite favorable customer traffic trends. (Same store sales measure sales at store open a year or more.)

Amazon, whose distinction is that it's a retailer with virtually unlimited shelf space, has guided investors for slower growth in profit margins. Combined with the market's general decline in recent months, that has pulled its stock back some 25 percent since the start of the year.

However, the two stocks' big drops have prompted some close watchers and opportunistic investors to snap up shares to take advantage of their depressed prices and rake in profits over the long term.

"We are taking this opportunity to upgrade (Amazon) to a buy from a hold," said Michael Graham, analyst at investment firm CANACCORD Genity. He has raised his price target to $750 from $600 based on a sum-of-the-parts approach. The analyst argued in a recent report that the shift to consumers buying online is the most important fundamental fuel for Amazon's core business. Globally, e-commerce only represents 6.7 percent of retail (7.4 percent in the U.S.), so that's an important factor relative to the company's potential for continued long-term growth, said Graham.

Amazon fulfillment centers that deliver within hours

He estimates that Amazon touches some 80 percent of U.S. e-commerce traffic, up from 74 percent in 2014. He thinks that share should expand even faster, leading to what he described as the growing "Amazon shopping habit." In addition, Amazon Web Services, which provides access to technology infrastructure that developers and enterprises can use to run nearly any type of business, "is an important tailwind to growth, margins and valuation," said Graham.

With Amazon's recent slide, its "valuation is as reasonable as it has been for years," said Graham. He has raised his earnings estimate for 2016 to $9.60 a share from $9.14, and for 2017 to $24.49 from $12.70, up from 2015's $6.08.

Revenues, which grew almost 20 percent in 2015, should jump some 21 percent this year, despite foreign currency headwinds, and 20 percent in 2017, forecasts Tuna Amobi, analyst at S&P Capital IQ, who rates Amazon as a "buy." He sees further market share gains versus traditional retailers in Amazon's core electronics and general merchandise offerings due to a focus on providing value to consumers through selection, price and convenience.

At Walmart, despite much negative publicity surrounding its disappointing fourth-quarter earnings, some investors haven't abandoned the stock. "Opportunity in owning Walmart is attractive in today's uncertain macroeconomic and market environment," said Ken Perkins, equity analyst at Morningstar. "Our wide moat rating and long-term thesis -- that Walmart can leverage sales growth as labor and e-commerce investments moderate -- remain intact," he added, noting that Walmart's global brand still attracts customers.

While Walmart's the stock has bounced about 15 percent off its lows, they still trade at a 12 percent discount to Perkins' fair value estimate of $75 a share, he noted. With an earnings yield of more than 6 percent, a dividend yield of 3 percent and the company repurchasing more than 5 percent of its outstanding shares, "Walmart's shares are priced to deliver solid long-term returns even if profits are merely stable," argued Perkins.

Part of what caused the disappointing fourth-quarter earnings was the impact of closing 269 stores worldwide. While U.S. Walmart sales increased 2.4 percent in the fourth quarter, consolidated revenue declined 1.4 percent, to $129.67 billion, although in constant currency, revenue had increased 2 percent.

"While these sales results are slightly below our expectations, we believe Walmart is taking the necessary steps to improve its long-term positioning, and note that the U.S. business appears to be on solid footing," said Robert Drbul, analyst at Nomura. The analyst rates Walmart as a "buy," with a price target of $70 a share.

Bottom line for investors about these two retailing giants is that they represent depressed values in an industry that's generally attractive for continued growth, anchored on consumer confidence and a stable, and improving economy. Plus, consumers love to shop, which has been augmented by the convenience of e-commerce.

Amazon's attraction is its genius in selling and offering every imaginable product available through multiple platforms. Walmart's attraction is the continued pull of its global name among mostly middle-income consumers in the world's biggest markets, such as the U.S. and China, and the company's determination to protect its turf and pursue what may be an almost impossible dream -- compete with, if not beat Amazon.