Is Walmart the Safest Stock to Own if the Tech Sell-Off Gets Worse?

Many investors have historically flocked to the safety of consumer staples stocks like Walmart (NASDAQ: WMT) during market downturns or economic slowdowns.

Over the years, Walmart stock has outperformed the market during corrections, bear markets, periods of high inflation, and challenging economic environments because of its lower prices. It gets more foot traffic as shoppers look for deals, pulling in both its traditional budget-conscious shoppers and higher-income consumers who don't want to overpay.

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If you look at the last bear market in 2022, when inflation was running rampant, Walmart stock was only down 2% compared to the 19% drop in the S&P 500 (SNPINDEX: ^GSPC) and the 33% decline in the Nasdaq Composite (NASDAQINDEX: ^IXIC).

In 2008, Walmart stock rose 18% while the S&P 500 was off 38% and the Nasdaq fell 40%. And in 2002, when the S&P 500 dropped 23% and the Nasdaq fell 31%, Walmart stock was only down 12%.

Since the Nasdaq closed at an all-time high of 27,599 on Oct. 6, the tech-heavy index has been down about 4%, to roughly 26,470.

Walmart, on the other hand, has been surging in October, up 9% since Sept. 30. The rally has boosted Walmart's year-to-date return to 13% after a summer swoon.

Are investors once again making a flight to safety during a tech sell-off? And are they right to pick Walmart as the safest defensive stock to own? That's debatable.

Big value, big valuation

Walmart is typically a great defensive play, but it's not that great in this particular market. It has had a strong run over the past three-plus-year bull market, continuing its market-beating performance from 2022.

It has averaged a total annualized return of about 32% over the past three years, beating both the Nasdaq Composite and the S&P 500. It successfully pivoted during this period to appeal to a higher-income clientele through investments in its stores, inventory, and online shopping to improve the overall consumer experience.

At the same time, its main rival, Target (NYSE: TGT), had been struggling to attract customers amid higher prices, among other issues, during the bull market. Walmart was able to take some market share from Target, particularly among higher-income shoppers.

But with that success comes a high valuation. Walmart is trading at around 43 times earnings, which is well above its 10-year average of 32. Its forward P/E is 36, but that's still above its long-term average.

Given that its earnings growth estimates are about 9% for fiscal 2027 and 11% for fiscal 2028, I don't think that's enough to carry the high valuation. Walmart has many attributes that should allow it to perform well in a downturn, but like many tech stocks, it's overvalued right now. For that reason, I wouldn't call it the safest to own if things get worse.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target and Walmart. The Motley Fool has a disclosure policy.