On paper, you might think that people being holed up in their homes is a huge benefit for United Parcel Service (NYSE:UPS). With nothing to do, people will get stir crazy. As the concept of retail therapy demonstrates, one solution is consumption. But with the physical platform temporarily gone, many will turn to eCommerce sites like Amazon.com (NASDAQ:AMZN). Naturally, this should help lift UPS stock in this troubled period.
An increasing number of Americans are joining those who have been working from home. At first, certain companies encouraged some of their employees to telecommute. But as the coronavirus devolved into a pandemic, several companies – including high-profile names like Apple (NASDAQ:AAPL) and Nike (NYSE:NKE) – simply closed their physical locations. Logically, this provides more opportunities for online shopping, which may then bolster UPS stock.
Of course, these closures are voluntary decisions that many companies have made. However, several jurisdictions have taken that control away and instituted mandatory shutdowns. The latest and most economically significant example is California. Late Thursday, California Governor Gavin Newsom declared a statewide stay-at-home order in a desperate bid to flatten the infection curve.
In the Golden State, more than 1,000 cases have been reported with 19 deaths. It’s rapidly approaching second-hardest-hit state Washington, which has nearly 1,400 cases.
Again, from a cynical perspective, this appears to be a catalyst for UPS stock. As you know, California is a big state and there’s no shortage of retail options here. But with essentially the mandatory shutdown, folks have nothing better to do than watch TV and shop online.
And as an economic powerhouse, on average, its citizens can afford to live this sedentary lifestyle. But that’s also where the party ends.
UPS Stock May Get a Temporary Lift and That’s It
While it’s true that California is the fifth-largest economy in the world if it were its own country, that’s also the problem. As the heart of the American economy, it cannot afford to flatline, but that’s exactly what’s happening if you think about it.
Look, I think you can surmise from my prior articles on InvestorPlace that I’m not a big of Governor Newsom. Admittedly, I’ve called him names, some of which I can’t repeat here or anywhere really. This has nothing to do with politics. I want him to be successful. It’s just that he’s making a very serious decision for not only California but the country (and the world).
And if the Golden State starts to rupture economically, that’s it. Whatever gains UPS stock may have earned, it would quickly give up when the rest of the nation falters.
Furthermore, the companies that have seen their employee base uprooted cannot maintain this façade indefinitely. For some industries, I’m not even sure if they can go on for a week or two. As a prime example, movie theaters have shut down earlier this week. Well, these businesses have high fixed costs. Frighteningly, they could all go belly up without a bailout.
And those employees? They’re not going to be buying stuff online. Obviously, they’re in survival mode.
That will really apply for most of us at some point. If we’re going to choose between sustenance and a video game (or whatever discretionary item you want) during a crisis, rational actors will always choose the necessities.
Frankly, I’m not sure if consumer sentiment is strong enough for UPS stock. With everything about coronavirus, from the economic impact to its deadliness, we are surrounded with uncertainty. This is a time for saving, not buying.
A Surprising Competitor
Now, if you were planning on speculating on UPS stock for its supposed coronavirus catalyst, you should be aware of one more threat: competition.
As I mentioned above, consumer purchases will likely focus on the essentials, like food and water. In that case, you’d rather just deal with the grocer’s delivery option. For instance, Kroger (NYSE:KR) offers food delivery services, as well as in-store pickups. Indeed, in this environment, management would prefer you to use these platforms.
Sure, you can order emergency supplies and have them delivered via UPS. Still, once this type of spending along with discretionary purchases dry up, UPS will be left with a very deflated and worried consumer. From that point on, it’s largely grocery and pharmacy shopping, where the underlying organizations typically have multiple delivery options.
In any other circumstance, I’d buy into the long-term narrative. But at this juncture, there’s no way. I need to see where we are in at least a month before thinking about UPS.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.