Betting On Retail Stocks At the End of the Brick-And-Mortar World

Covid-19 has accelerated the shift towards e-commerce; what's next for retail stocks?

The stock market’s big rebound keeps on climbing, which has been great news for investors, and the stocks I’ve been telling readers about since mid-March. I continue to expect great results from these investments over the coming months. But at the same time, I expect the road ahead will be a bumpy one, full of periodic setbacks.

Source: Shutterstock

As this zigzag action plays out over time, the best stocks will progress higher. But many others will not.

We are seeing this divergence play out in real time, as investments such as the so-called “shelter in place” stocks are rising or even hitting new all-time highs, while stocks heavily exposed to brick-and-mortar retail struggle to gain any ground whatsoever. And I expect these divergences to persist for a long time.

Many retailers have suffered life-threatening financial trauma that will send them into bankruptcy. Meanwhile, a workforce with 20% unemployment is unlikely to rush back to shopping malls, even if the virus suddenly posed zero threat to their health.

In other words, brick-and-mortar retail now faces even greater challenges than what it had been over the past few years.

In today’s report, I’ll go over why brick-and-mortar retail will continue to fail, even if the coronavirus epidemic ends tomorrow. I’ll show you three retail stocks that are beating the odds. And I’ll show you how to go about betting on the ongoing “retail apocalypse”…

“Going the Way of the Woolly Mammoth”

Over the past 10 years, online retail sales growth has outpaced non-online retail sales growth in the U.S. by 7 to 1, more than doubling as a percentage of total retail sales.

The “Amazon-ification of commerce” has crushed the brick-and-mortar retailing industry from coast to coast.

Amazon (NASDAQ:AMZN) just hired hundreds of thousands of new workers during a period when millions of Americans filed for unemployment. And on the other side of the epidemic, a large percentage of folks who have boosted their online shopping activity will maintain a higher level of online commercial activity than  they did before the epidemic.

Clearly, Amazon is a net winner from the crisis — as it always seems to be.

But Amazon and Covid-19 aren’t the only destroyers of conventional retailing.

Some retailers like Lululemon Athletica (NASDAQ:LULU) have developed robust online sales channels to complement their select brick-and-mortar locations. This “omnichannel” approach is producing great success for a few savvy retailers.

And Kroger (NYSE:KR) is demonstrating an impressive level of flexibility and innovation to revive its fortunes. The company’s forward-looking team-up with Ocado Group PLC (OTCMKTS:OCDGF) to build robotic grocery warehouses around the country demonstrates its ambitious efforts to get out in front of changing consumer buying habits.

But most brick-and-mortar retailers are failing to innovate. As a result, they are sinking slowly into irrelevance. These stores are going the way of the woolly mammoth.

In 2019 alone, an estimated 12,000 retail stores closed. And the tally of store closures continues to grow by the day. Investment bank UBS estimates that U.S. retailers will shutter another 75,000 physical stores by 2026.

Many leading retailers are showing a drop in revenue, while the very best companies are producing negligible revenue growth. Meanwhile, debt loads are soaring. These negative trends are weighing on stock prices throughout the retail sector.

Source: Chart by InvestorPlace

Although this downtrend is well established, it shows no sign of stabilizing or reversing. To the contrary, the sector continues to exhibit market-lagging performance.

A Way to “Short Sell” Dead Malls

Long before the coronavirus hit, e-commerce was growing rapidly worldwide. That’s hardly a secret.

According to Statista, retail e-commerce sales worldwide totaled $3.46 trillion in 2019 – nearly double the 2016 tally. And e-commerce volumes are on track to soar another 8.5% over the next three years, according to eMarketer.com.

As online retailing gains momentum, it is taking a very visible bite out of traditional brick-and-mortar retailing. That’s no secret either.

Source: Chart by InvestorPlace

Still, e-commerce represents less than 15% of total U.S. retail sales. That share is similar to the percentages worldwide.

But e-commerce isn’t just about destroying the old ways of retailing and taking market share. It is about establishing an entirely new mode of commerce.

That’s a big reason why “big box” retailers have been struggling for many years. Sears, Blockbuster, RadioShack, Circuit City, Borders, Sports Authority, and Toys “R” Us have all gone to retail heaven (or are almost there).

Even before the coronavirus, many “best of breed” retailers were struggling to compete. During the last three years, revenues at Walmart (NYSE:WMT) have grown a meager 7%, while Amazon’s have doubled.

The coronavirus is supercharging this trend.

That’s why I recently recommended that members of Fry’s Investment Report reestablish a position in an investment that allows them to bet against brick-and-mortar retail… and on the retail apocalypse.

I first recommended this hedge trade back on Feb. 6. Less than two months later, as the stock market was cratering, we closed out that position for a gain of 43.8%.

But I think this investment has further to go. After all, a rallying stock market does not change the fact that brick-and-mortar retail is facing a world of hurt.

You can find out all about it by joining us here.

If my analysis is correct, this investment will be a solid winner in a falling market, or a worthwhile hedge in a rising one.

Regards,

Eric Fry

P.S. Opportunities for extraordinary gains exist in any market, bullish or bearish. Some of the best stock traders in U.S. history made fortunes because of big moves they made while others sat on the sidelines during turbulent times. And I believe there are four companies you must buy right away to capture the biggest gains in the market going forward.

You probably haven’t heard of a single one of these firms… but I hope you’ll listen. To date, I’ve found 40 investment opportunities in which folks could have made 1,000% gains or more following my recommendations. Check out my new presentation on what to buy now here.

Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends … before they take off. And when it comes to bear markets, you’ll want to have his “blueprint” in hand before stocks go south. Eric does not own the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/betting-on-retail-stocks-at-the-end-of-the-brick-and-mortar-world/.

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