HOW TO AMAZON-PROOF YOUR PORTFOLIOS
Some stocks could have traits to survive retail giant’s onslaught
Nothing is worse for shareholders of a company than discovering that Amazon.com Inc. has decided to move into their industry.
Already this year, the Seattlebased online retail giant helped send the stock price of auto-part sellers skidding after word got out Amazon was getting into their business.
Then, Amazon made a move into meal kits, contributing to the decline of industry leader Blue Apron Holdings Inc.’s shares, which have been tumbling since their debut in June.
The grocery sector is now the latest to feel Amazon breathing down its neck after the e-commerce giant acquired Whole Foods Market Inc.
That transaction closed earlier this week, and was marked by Amazon instituting several pricecuts at the upscale supermarket chain, putting other retailers in the industry on notice that they face a strong challenge.
The impact has become so severe that assessing whether a company could some day face competition from Amazon has become part of the investment decision for analysts and investors alike.
Some stocks, however, could have characteristics that make them better-suited to survive Amazon’s onslaught. Here are some potential ideas for building an Amazon-proof portfolio:
BE VERY, VERY DIFFERENT
One way a company could avoid an Amazon ambush is to be in a unique line of business that the online retailer will simply steer clear of.
BMO Capital Markets said Wednesday that Dave & Buster’s Entertainment Inc., owner and operator of restaurants filled with arcade games, has the “strongest competitive moat, including Amazon insulation.”
BMO cut its price target on Dave & Buster’s to $72 per share from $77, but maintained its outperform rating on the stock, citing its defences against Amazon.
“Where competition does exist, competitors tend to suffer from issues such as poor new unit returns, limited scale, and the absence of national brand recognition,” wrote analyst Andrew Strelzik. “In addition, PLAY’s experiential usage occasion creates a buffer from Amazon intrusion.”
FAN OUT
Not putting all their eggs in one basket could also help companies keep Amazon from eating their lunch.
A Raymond James note on First Capital Realty Inc., Canada’s leading owner of properties that play host to supermarkets, dubbed the company: “The Most Insulated Retail Landlord from Amazonifacation.”
Raymond James said earlier this month that First Capital “has the highest quality retail portfolio in Canada,” and that the company’s diversification could help it shake off the struggles in the retail sector.
“Roughly a third of their portfolio is completely insulated from e-commerce (restaurants, MOBs, gyms, daycare, etc.), with another ~50% made up of necessity-based retailers (grocers, pharmacies, liquor stores, discount stores),” noted Raymond James. “Beyond the strong tenant base, the urban locations command much higher rents than peers.”
GO BIG OR GO HOME
When the going gets tough, it may be time for the tough to think about expanding.
One of Amazon’s biggest competitors — Costco Wholesale Corp. — knows a little something about size, as the company is famous for its massive stores and bulk-packaged goods.
Eight Capital said in a note on the Whole Foods’ price-cuts that Costco “has been one of the bigger market share gainers in recent years on the back of steady square footage growth and compellingly priced goods that are supported by membership fee income.” The firm said that they wouldn’t be surprised if Amazon followed in Costco’s footsteps in that regard.
Foot Locker Inc., a purveyor of brand-name footwear, may also be able to better weather the Amazon storm because of its size. Although Foot Locker’s stock price recently tumbled after it reported a drop in samestore sales, the retailer’s footprint could have it in a stronger position to help stave off e-commerce competition.
“Since Amazon is more of a player at mid-tier price points, we think it will steal sales from other mid-tier players, rather than Foot Locker,” said Morgan Stanley this week.
The firm said that the “right call” is still to own Foot Locker, “although we continue to view FL as a 12-to-18 month idea.”
“The thesis was based partly on the idea that FL can defend itself against Amazon,” said Morgan Stanley. “Not only do we continue to believe this is the case, but we also still think Amazon fears are incorporated into the stock price.”