* Opportunities are being created
"Buy at the sound of cannons? If the overall market corrects, as I suspect it will over the next few months, the more traditional brick-and-mortar retail stocks likely will fall back into the bargain bin and could provide a profitable entry point ... The disintermediation of old-line, bricks-and-mortar retailers provides longer-term opportunities for those who buy the right companies at reasonable prices."
--Kass Diary, "How to Profit From Shifting Retail Distribution Channels," January, 2017
The performance of retail stocks on Monday can be described in two words: a debacle.
My hopefully reasoned analysis is that the long-awaited capitulation phase (predicted above back in January) is upon us, out of which may result unprecedented opportunities for the bold investor with a long-term time horizon.
As usual, the principal cause is the broad reach and market impact of Amazon (AMZN) , which is part of the Trifecta Stocks portfolio. There are a number of subplots on this theme. Here they are in more or less chronological order. Readers can assume their own factor weightings as to relative import:
- AMZN announces it is increasing its apparel efforts, introducing several private labels and inking distribution deals with most major apparel sellers.
- AMZN announces it is buying Whole Foods (WFM) . Big trouble for food retailers. AMZN does not detail its plans to go into food retailing, a far different business than general merchandise due to the need to invest in multiple temperature warehouses and the more rapid stock turn. At last look, food retailing was very capital intensive. (Alliance Bernstein's research brokerage subsidiary discovered that Costco (COST) generates most of its sales from food and reasoned it was in the way of AMZN. In broker speak: sell.
- AMZN announced it was going into services, especially "Smart Home" where it will use its Alexa and Echo products as cornerstones of its efforts. This intersects to some extent with Best Buy's (BBY) services division (Geek Squad), which currently generates about 5% of BBY's profits. Lost in translation was that under current management, BBY successfully has taken on AMZN in its core business, with the stock more than tripling during the battle.
- Abercrombie & Fitch (ANF) , a teen apparel retailer, announces it no longer can find a buyer, shortly after informing Wall Street that it had several waiting in the wings.
In today's market, the effect of all of these developments seems to be cumulative and reinforcing to those entities deemed by the market to be in Amazon's way.
This morning, Jim "El Capitan" Cramer, in "Only Takeovers Can Save the Mall," sees mergers as one of the only possible alternatives for many retailers.
In reality, it is difficult if not impossible for Amazon to put everyone out of business, especially at the same time. The government, with its antitrust laws, eventually will get involved, especially given Amazon's low or no profitability (predatory price cutting).
Let's not lose sight that the retail industry employs millions directly and those people all have senators and congressmen.
As I wrote in late June, Amazon's vast might may be soon under a microscope:
"Something's happening now, though, something no one seems to be noticing, and that's the characterization seeping in that Amazon, loved by consumers, might end up being the evil empire."
In "Darth Vader, Meet Amazon" (cited above), Jim Cramer goes to the core of the concerns I expressed in "Amazon's Deal for Whole Foods Will Bring More Destruction and More Scrutiny," in which I wrote:
"With the Whole Foods transaction, Amazon's vast power will be under the microscope. Is Amazon a productive change agent and force for the good of the consumer by virtue of a reduction in product prices? Or is Amazon's disruption of the general retail business a destroyer of jobs, moving previously productively employed workers into the unemployment line?
* Unlike Jim, it is my view that Amazon's shares should be sold on strength as the company could face regulatory restrictions in reaction to its expansion plans and customers who use the service could face a rising tax burden over the intermediate term. It is not clear to me, given the extended valuation, that investors will be so patient with this possible threat.
* Given the disruptions in jobs, malls and elsewhere, I wouldn't be surprised if the proposed acquisition and future acquisitions will be opposed by many, possibly including politicians and regulatory authorities. (Note: Retail stores are closing with rapidity -- an estimated 8,000 stores in 2017 alone compared to about 4,000 in recession-savaged 2008 -- as the business landscape radically has changed due to Amazon's strategic alliances and business objectives and strategies."
Frankly, in the face of bona fide threats of regulatory and political opposition to Amazon, we against all odds finally may be facing "Peak Amazon," but for different reasons than many would have expected.
Amazon only has $14 billion or so of EBITD, nearly all of which comes from D (depreciation). That number is growing at 20% annually. Much of the growth is foreign. The entities that are in the way have EBITD several times that amount and generate billions of free cash flow (FCF), some of which is used for dividends. Current valuation of those entities is in the area of 4 to 8 times trailing 12-month EBITD.
In an environment of strong consumer income and employment growth, with wages finally picking up and record stock and home prices augmenting consumer wealth plus a consumer tax cut eventually likely, it would seem there are abundant buying opportunities in retail for those who are willing to buy a falling knife and who have a longer investment time frame.
* Likely retail industry consolidation through increased merger activity (see Jim Cramer's comments).
* Potential antitrust issues and scrutiny facing change agent Amazon as it expands its might and reach -- and brings more destruction of jobs and businesses in the process.
* An improving picture of continued strong consumer income and employment growth.
Other retail stocks are getting cheap and I am poised as the cannons begin to sound.
(This article originally appeared at 10:00 a.m. ET on July 11 on Real Money, our premium site for active traders. Click here to get great columns like this from Jim Cramer, Doug Kass and other writers even earlier in the trading day.)
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