The Hunt for Survivors in an Amazon-Dominated World
It’s been well-documented here…
Amazon (AMZN) is a serial killer, and its prey is retailers — ones who never thought of building a moat.
Now, I’ll be the first to concede…
In the old paradigm, retailers didn’t need to think much about moats:
The term “economic moat,” coined and popularized by Warren Buffett, refers to a business’ ability to maintain competitive advantages over its competitors in order to protect its long-term profits and market share from competing firms. — Investopedia
As long as your store enjoyed 1) a courteous staff, 2) competitive pricing and 3) a good location — all was well.
But today? Those three metrics — standing alone — would put you out of business in six months. If not sooner.
And on the heels of Amazon’s acquisition of Whole Foods, which closed this week, investors are convinced that every retailer is in Amazon’s cross hairs.
Not so fast!
Bespoke Investment Group recently compiled an “Amazon Survivors” Index, which includes retailers they believe can survive Amazon’s onslaught.
After digging into the data, we found some timely and actionable surprises that warrant your immediate attention.
Look for downtrodden — but not out — retailers for triple-digit gains.
Everybody loves a comeback… especially on Wall Street. And they still exist in the beleaguered retail industry.
Look no further than the best-performing stock in Bespoke’s “Amazon Survivors” Index — Lumber Liquidators Holdings Inc. (LL).
You’ll recall the nation’s largest hardwood flooring company was rocked in 2015 by a scandal involving Chinese-produced flooring that it sold containing unsafe levels of formaldehyde.
The company shed more than 80% of its market value in just six months.
But boasting a one-year gain of 118%, today it’s the best-performing stock in Bespoke’s “Amazon Survivors” Index.
It’s also outperformed the S&P 500 by tenfold over the same period.
Yes, you read that right.
Paying out tens of millions in legal costs, Lumber Liquidators has finally put the majority of its legal woes resulting from the scandal behind it.
And the firm crushed analyst estimates with its fiscal second-quarter results — beating the Street by 2% on the top line, and more than 300% on the bottom line.
This year, sales are expected to grow nearly twice the rate of the industry.
Better still, the company has a debt-to-equity ratio of just 0.3. That’s almost a tenth of the industry average (2.9).
If you’re looking for an Amazon-proof momentum play on retail — right now — look no further than Lumber Liquidators.
If you’re looking to outperform the S&P 500 by tenfold in the future, scouring the “Amazon Survivors” Index for down but not out companies wouldn’t be a bad place to start.
Think outside the box to unlock Amazon-proof profits.
Look around you.
If you’re at home, odds are that anything you see could be bought on Amazon.
For cheaper than most other places – and with free two-day delivery.
That’s the secret right there: If it can fit in a box on a truck, it is now part of Amazon’s potential market.
So find a market that’s out Amazon’s reach.
Enter our second surprise on the Amazon Survivors list, Camping World Holdings Inc. (CWH).
RV owners and camping enthusiasts are looking to make big purchases that they want to see and touch well before they purchase, and Camping World fits the bill.
Amazon simply can’t meet the level of customer service necessary to handle such large-item purchases.
And they certainly don’t have trucks big enough in which to fit RVs.
The fundamentals of the company speak to this, loud and clear…
In the last year, earnings have grown at a rate of 32%.
And on a forward 12-month basis, EPS are projected to rise by 35%. That’s more than ten times the industry’s forecasted growth rate (3.5%) over the same period.
Camping World is a great example of a successful retail business model, doing something Amazon just flat out can’t do.
Forget inclusion… absences from the list are equally telling — and make for compelling trades.
A few weeks ago, we wrote:
“When you consider that almost half of U.S. households are now Amazon Prime subscribers, department stores like Macy’s and J.C. Penney are sleepwalking into their graves.”
To no one’s surprise…
Macy’s and J.C. Penney are not listed on Bespoke’s “Amazon Survivors” Index.
That means if you’re not opposed to selling stocks short, such absences represent timely trades, too.
After all, there’s not much that can stand in the way of Amazon’s ability to wipe out brick-and-mortar retailers.
Sure, President Trump’s support for an internet sales tax might level the playing field taxwise between internet and physical retailers. But it will only postpone the inevitable death. Tax savings are not the reason everyone shops on Amazon.
It’s also possible that Amazon’s practice of “commingling” supplies from different suppliers, which allows fake and low-quality goods to enter its distribution chain, could slow down its dominance. But again, any such delays will only be temporary.
Bottom line: Don’t bet against Amazon. Bet on its continued dominance and invest accordingly.
Any thoughts of finding and investing in a company that’s going to disrupt and dethrone Amazon is pure foolishness.
But that doesn’t mean we should simply buy Amazon shares and avoid every other retail stock in perpetuity.
As Bespoke’s “Amazon Survivors” Index reveals, ample opportunity still exists in the sector. We just have to pick our investments wisely by buying companies with well-defined moats and/or betting against ones without any.
Ahead of the tape,
Chief Investment Strategist, Wall Street Daily