Is Amazon.com (AMZN) taking over the retail world? It seems so—not a week goes by without Amazon announcing a new foray into another retail sector with the possibility that Gorillazon (Amazon) could dominate the sector within weeks or months. But retail isn’t the only sector affected by Amazon’s outsized influence—the company is creating cheap investments in a variety of sectors. More on that in a bit.
Amazon Disruption Creates Cheap Investment Opportunities
The latest bombshell to hit investors and consumers is the new agreement between Amazon and Sears (SHLD) whereby Amazon will sell Kenmore appliances for Sears. Everybody knows about Sears’ financial difficulties. Sears has a heavy debt burden and huge losses and has closed hundreds of stores. The Amazon/Sears deal will help sell more Kenmore appliances because of Amazon’s massive e-commerce business, but Sears could end up selling fewer appliances from its stores.
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The effect on the giant retailers that sell appliances, such as Home Depot (HD), Lowe’s (LOW) and Best Buy (BBY), will be minimal. These three retailers don’t even sell Kenmore appliances. Sears could benefit—even though its stores will probably sell fewer appliances—because Sears will deliver and service Kenmore appliances sold by Amazon.
The announcement by Amazon and Sears sent the stock prices of Home Depot, Lowe’s and Best Buy down noticeably last week. The beat-down was excessive and presents excellent opportunities to buy top-notch retail stocks at bargain prices. I recommend buying Lowe’s or Home Depot, cheap investments which are on my Cabot Value Model buy list. Buy LOW and HD.
Prior to the Sears announcement, Amazon shook the grocery world when the company declared it would buy Whole Foods (WFM). Amazon’s purchase of the grocery is a big deal, and it could disrupt food retailers such as Kroger (KR), and to a lesser degree, Walmart (WMT) and Target (TGT). Amazon’s plans for Whole Foods are sketchy, but food could become a major part of Amazon’s empire if the company can gain regulatory approval.
Another story to hit the news described Amazon’s intentions to offer home delivery of “meal kits” with ingredients ready-to-cook. This business model is similar to Blue Apron’s (APRN). Amazon will probably tie the business into its Whole Foods division, if the Whole Foods acquisition is approved.
An additional important venture for Amazon is the signing of an agreement with NIKE (NKE) to sell athletic shoes for the retail giant. If Amazon can win contracts with major retailers, the sky’s the limit and the possibilities are endless. The deal with NIKE ought to benefit both companies. Buy NKE.
Amazon’s huge success is a result of consumers’ demand for convenience and low prices. The company has been able to create many opportunities to keep shoppers at home rather than going to stores or the mall which can be inconvenient and time-consuming. Amazon offers one-stop shopping on the internet with free delivery to customers’ doorstep.
Amazon-Proof Sectors
Are there any sectors that won’t be disrupted by Amazon? For the foreseeable future, there are plenty. Consumers contribute 70% of GDP (gross domestic product) in the U.S., and Amazon only holds a 5% share of consumer retail sales.
Amazon sells cosmetics and beauty products on the internet, but the brick-and-mortar store Ulta Beauty (ULTA) has been able to find a niche. Ulta sells specialty cosmetics and provides in-store services, where customers can get advice and get their makeup done. Ulta currently isn’t on my buy list, but I have informed my Cabot Benjamin Graham Value Investor subscribers that if the stock dips to a certain level, then they should jump in and buy Ulta Beauty. Add ULTA to your watch list.
These Companies Will Benefit from Amazon’s Success
Amazon’s stock price is now over 1,000 and the price-to-earnings ratio (P/E) is 150 based on consensus 2017 earnings per share estimates of $6.75 and 90 times 2018 forecast earnings of $11.30. Amazon doesn’t pay a dividend. Rather than buy AMZN stock and pay a very high price, I recommend searching for cheap investments that will benefit from Amazon’s success.
Credit cards and debit cards are used by most Amazon customers when ordering merchandise. Transaction volume is increasing at a rapid rate, and MasterCard (MA), Visa (V), American Express (AXP) and Discover (DFS) all offer their services to Amazon customers. I like Discover because the shares sell at a reasonable price with a current P/E of 10.5 and dividend yield of 1.9%. Buy DFS.
Amazon ships millions of items in cardboard boxes. The major cardboard box makers supplying boxes to Amazon are Sonoco Products (SON), Packaging Corp. (PKG) and International Paper (IP). I like IP because the company supplies more than 50% of the boxes used by Amazon. International Paper is a diversified company, so Amazon boxes only make up a small percentage of sales, but the box division of IP is growing at an accelerating pace. Buy IP.
Amazon is building its own fleet of aircraft to ship merchandise to customers, but the fleet is small and Amazon’s aim is to use its aircraft only during peak seasons. The company mostly relies on FedEx (FDX), UPS (UPS) and the U.S. Postal Service to make shipments. My favorite air freight carrier is FedEx, which is large and can accommodate Amazon’s needs. Buy FDX.
Discover, International Paper and FedEx are cheap investments that offer inexpensive ways to obtain some of Amazon’s amazing growth without paying an outlandish 150 times earnings per share. The average P/E for the three alternative companies is 17.2 with a 2.0% yield.
Until next time, be kind and friendly to everyone you meet.
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