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This is your Cue to Start looking at Retail Stocks

September 29, 2017 By Jeremy Jones, CFA

Retail is a competitive business. The barriers to entry tend to be low and far too many publicly traded firms have businesses that aren’t durable enough for conservative long-term investment. Amazon has put the wood to many of these firms. The WSJ reports in the article below that the “Amazon Effect,” (not to be confused with “Bezos Law”) has led to a souring on global retail stocks.

Amazon is a darling of the financial press and in many Wall Street brokerage houses. Amazon has had a real impact on brick and mortar retailers, but the most pronounced effect has been in the stock market. As much as investors love Amazon today, they hate the physical retailing space even more.  I’m not sure there is an industry that is more unloved, forlorn, and out of favor today than brick and mortar retailing.

That’s not an indication that the bottom is in for retailers. There are likely to be many more bankruptcies before we reach that point, but if you are an investor in the out of favor, retail is an industry you are going to want to keep an eye on. Yes, there are many mediocre businesses in the space, but one can see a scenario where a culling of the weak leads to greater profitability for those firms that survive.

Riva Gold and Saabira Chaudhuri write in the WSJ:

Amazon.com Inc.’s AMZN +0.41% expanding reach is prompting investors to dump shares of retailers far from the U.S.

The Seattle-based company is hastening a global move to online shopping that is plunging many overextended retailers into crisis, forcing some to eliminate physical stores, cut prices or even file for bankruptcy.

While the “Amazon effect” has been most pronounced in the U.S., investor concern overseas has been rising.

“Virtually every retailer needs to assume Amazon is coming for them,” said Eddie Perkin, chief equity investment officer at Eaton Vance EV -0.44% Investment Managers. “What companies and investors thought were immune categories have turned out not to be immune.” Mr. Perkin has been avoiding shares of many brick-and-mortar retailers even as their prices have fallen.

The Stoxx Europe 600 retail sector has shed 3.7% so far in 2017, even as the wider European benchmark has gained 6.9%. Retail was Europe’s least popular sector among fund managers surveyed by Bank of America Merrill Lynch in September. Europe had been partly sheltered from Amazon’s impact until recently. In 2015, the Stoxx Europe 600 retail sector had gained 8%, even as the U.S. SPDR S&P Retail ETF fell 9.9%.

Read more here.

 

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Jeremy Jones, CFA

Jeremy Jones, CFA is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. Jeremy is a contributing editor of youngresearch.com.
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