How to “Amazon-Proof” Your Portfolio
Amazon shares just hit another all-time high.
If you’re an original shareholder — congratulations on your 58,575% gain.
But as historically impressive as Amazon’s rise is — its market capitalization recently eclipsed $400 billion — it’s only half the story.
The more depressing storyline is Amazon’s ruthless destruction of brick-and-mortar retailers.
Business Insider reports that…
- Amazon sold six times more online than the next eight largest retailers combined”
- “Amazon’s growth in online sales volume was 10 times higher than the eight large retailers combined”
- “Amazon alone generated about 30% of U.S. retail sales growth.”
Boy, since Amazon seems primed to eradicate every weak retailer — I called an emergency meeting with my staff.
My impromptu meeting sought to answer the following question…
Does the retail sector still deserve a 10% share of your portfolio’s asset allocation?
We ultimately decided that retail is still viable and worthy of representation in any well-balanced portfolio.
But with Amazon looming over the industry like a mob boss, you have to be strategic.
I asked my senior analyst, Martin Hutchinson, to help our readers “Amazon-proof” their portfolios.
Ahead of the tape,
Chief Investment Strategist, Wall Street Daily
Question: Martin, the numbers coming out of the retail sector get worse with every passing quarter, and it’s all thanks to Amazon. Put simply, Amazon is becoming one of the greatest disrupters in market history. Do you see this monster of a company continuing to feast on traditional retailers?
Martin Hutchinson: I’m not sure Amazon’s going to make a huge amount of money on it. But yes, I think retailers have a big and growing problem from online competitors like Amazon and others. Online sales were only 8.8% of total U.S. retail sales in 2016, but they’re growing fast.
The big-box retailers in particular are in trouble — Sears, J.C. Penney and Macy’s. They’ve all tried to get an online division, but that’s actually not the solution. Their online presence is small compared with Amazon’s, and so Amazon is more efficient logistically. It’s very difficult for them to scale nationwide. It requires a different set of assets other than having a bunch of stores.
Also, because Amazon doesn’t care much about making profits, it cuts prices. So competitors’ margins are lousy if they’re competing against Amazon. I see lots of retailers going belly up in the next downturn. Shopping centers as well, which need physical retailers to survive.
Question: If you’re a brick-and-mortar retailer, what does it take to be Amazon-proof?
Martin Hutchinson: I think you look for retailers where the buyers need to touch and sample the goods before committing. You want high-touch products with an in-store experience, to use the retailing jargon. There are four obvious sectors here…
One is clothing and fashion, both men’s and women’s. You can buy commodity clothes online if you just need a new sweatshirt, but you can’t buy clothing that has to be fitted online. And you can’t buy clothing where you want to feel the fabric and see the exact color, and so on, online. Certainly, fashion clothing is a high-touch experience.
A second sector is medium- to high-end cosmetics. Again, not the commodities — but the ones where you want to smell it and feel it before you buy. That’s primarily a women’s market, of course.
Third is personal service — haircuts and getting your nails done. All those are things where you actually need to have a human being dealing with you.
Then the fourth one that might have possibilities is arts and crafts — stores like Michaels, where the store itself sparks off ideas.
Question: Hutch, you know we advocate a diverse portfolio and historically we would want a piece of our portfolio allocated to retail. But that’s getting increasingly difficult with Amazon disrupting the space. What do you suggest to our readers?
Martin Hutchinson: I think overall your allocation to retail should probably be a bit smaller than the sector would normally have. But I think there are still high-touch retailers that are interesting. One would be Ulta Beauty, the cosmetics company, but it’s selling on 45 times earnings.
A better one is Signet Jewelers, which owns Zales, Jared and Kay jewelry stores. The shares have been beaten down recently because of a sexual harassment lawsuit. But it looks to be a buying opportunity, because I think they can settle the lawsuit, fire a couple of people, reorganize their HR practices and so on — all fairly easily.
The company is selling on 10 times historic price earnings and 9 times prospective price earnings — which is obviously extremely cheap in this market. Earnings are expected to increase in 2017, and jewelry, of course, is the ultimate high-touch business. People want to feel it before they buy it. I think this is one of relatively few attractive possibilities in the retail sector.
Question: As always, Hutch, thanks for your insights.
Martin Hutchinson: A great pleasure being with you.
Question: This is Wall Street Daily signing off.
Senior Analyst, Wall Street Daily