Do You Own This Troubled Sector?

How to play the retail industry now that Amazon is changing everything

How much exposure does your portfolio have to traditional bricks-and-mortar retailers?

More importantly, of your retail investments, how many are successfully incorporating online strategies into their marketing/sales mix?

As you’re likely aware, Amazon has changed the game in retail. As you’ll see today, those companies that are adapting to e-commerce are staying alive — even thriving. But the traditional bricks-and-mortar businesses that are clinging to old ways are dying. If you own retailers, you need to give them a hard look to determine whether they deserve to remain in your portfolio.

Let’s start with news from one retail giant that’s successfully navigating this new online world …

***Yesterday, Walmart wowed investors by posting earnings per share of $1.41, easily beating analysts’ estimates of $1.33

While Walmart’s numbers were good across the board, what really jumped out was its e-commerce sales. They surged 43% year over year.

Walmart CEO Doug McMillion spoke to this in his remarks yesterday:

We’re excited about the work we’re doing to reach customers in a more digitally-connected way. Our commitment to the customer is clear — we’ll be there when, where and how they want to shop and deliver new, convenient experiences that are uniquely Walmart.

Posting 43% e-commerce growth is a significant win for Walmart — especially when you factor in that 49% of all online spending in the U.S. takes place on Amazon. That’s about 5% of all U.S. retail sales.

From CNBC yesterday:

Walmart has nailed the [question of]: “How do we transition online?” Moody’s lead retail analyst, Charlie O’Shea, said. “Now, they aren’t building stores, but are spending about the same on capex … that’s going into technology spend and going into e-commerce.”

***But while Walmart is weathering the Amazon-assault, the traditional retailers that aren’t adapting are getting squeezed … and closing their doors

As just the latest example, last week, the discount retailer Payless ShoeSource announced it plans to close all of its 2,300 stores when it files for bankruptcy later this month. It’s the most recent high-profile victim of Amazon’s impact on retail.

In the past year, we’ve also seen shut-downs from Toys ‘R’ Us, The Bon-Ton Stores, Shopko, FullBeauty Brands, Charlotte Russe, Things Remembered, and Gymboree.

The Payless news is especially timely given that just last week, I talked with veteran investor and editor of The Speculator, Eric Fry, about this “death-by-Amazon” effect on traditional bricks-and-mortar retailers. Eric’s market approach is unique in that he looks to profit not only by “going long” strong companies that appear to be poised for growth, but also by “going short” troubled companies that are hampered by either structural or company-specific problems.

This second approach involves betting against distressed companies — and one sector that Eric has identified as being especially primed for these types of bets is retail.

From the interview:

Jeff: On the short side, are there specific sectors you think are most ripe for gains or is it only going to be a company-by-company basis?

Eric: It’s always going to be by company, but in general, the gift that keeps on giving is what I call the Amazon-ation of retail. We’re seeing right before our eyes, this living, breathing, vibrant example of creative destruction. You have Amazon coming in and creating a whole new way of doing things and then simultaneously destroying a lot of other businesses.

The obvious victim is bricks-and-mortar retail. I mean, those companies are dying one by one by one by one. We’ve already seen a zillion retailers go out of business and they’re going to keep going out of business. So, for instance, when I run screens of return on invested capital, it’s uncanny — the top 100 worst operating companies are littered with retailers. There are so many retailers that are doing so poorly. So, I think that’s ripe territory for short-selling.

Eric’s strategy for profiting from distressed companies involves using options. We provided one example of this in our Digest on February 15, in which Eric helped his subscribers book 75% gains on troubled pharmaceutical company, Teva.

If you’re less familiar with options, it’s worth your time to learn more. When used correctly, they can be a lucrative addition to your investment approach. That’s because they can both magnify gains while limiting losses. To learn more about Eric, options, and his approach to the markets, click here.

Now, although the traditional retail sector contains many troubled companies, there are still big profits to be had from the retailers that are successfully adapting their online strategy

Walmart isn’t the only example of retail-done-right. Famed investor and editor of Growth Investor, Louis Navellier, has led his subscribers to gains in retail, in part, by focusing on companies with strong online presences — which are being reflected in solid fundamentals.

From Louis’ February issue of Growth Investor:

Lululemon Athletica (Lulu) has exhibited tremendous relative strength recently, so I continue to like it as a Top 5 Stock … Lululemon has more than 400 stores across four continents. And for workout buffs who are too busy to drive to their nearest store, there are multiple Lululemon e-commerce sites and mobile apps …

The company is also expanding into mass sports distribution and capturing market share from big-name athletic apparel companies like Nike (NKE) and Under Armour (UAA). That expansion was reflected in Lululemon’s third-quarter earnings report, where it beat estimates on the top and bottom lines.

So, I’m anxiously awaiting the company’s fourth-quarter report. The consensus estimate calls for earnings of $1.74 per share on $1.15 billion in revenue, which translates to 23.5% annual revenue growth and 30.8% annual earnings growth.

As of the time of this writing, Louis’ subscribers are up 17% in Lululemon. Louis considers it a buy under $170. Click here for more from Louis and his Growth Investor service.

***If you’re invested in retail stocks, take a hard look at what you own

Contrary to some thinking, traditional bricks-and-mortar businesses aren’t all dying. There will always be a place for the in-person shopping experience. Instead, what’s happening is that retail is changing — the companies that are thriving are integrating their online and offline strategies. The companies that treat online and offline sales separately are the ones running into trouble.

If you own retailers, review the latest 10Ks and 10Qs (the financial statements published by the companies). Look for commentary on the growth of e-commerce, as well as language on the integration of online and offline sales channels. Look at comparable sales volumes from in-store and online. In essence, you’re searching for evidence that the company is successfully blending the digital with the real world.

What you shouldn’t do is turn a blind eye to what you own, believing that because a retailer was strong yesterday, it will remain so tomorrow. The retail world is changing — and that might mean your portfolio should change too, whether that means by going long fundamentally-strong retailers like those preferred by Louis, or by shorting the fundamentally-weak retailers preferred by Eric.

Have a good evening,

Jeff Remsburg


Article printed from InvestorPlace Media, https://investorplace.com/2019/02/do-you-own-this-troubled-sector/.

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