Fund mgrs seek stocks Amazon can't conquer
Amazon.com's game-changing move to upend the grocery business with a surprise deal to buy Whole Foods Market compounds a problem already vexing fund managers: how to play US consumer spending when the Seattle-based e-commerce giant is threatening to take over retail.
Amazon's relentless growth and destruction of value among traditional retail rivals is forcing active fund managers to look for bets in areas they think Amazon can't or won't reach.
Emerging options include theme restaurant chains, recreational vehicle makers and sellers of stuff that's just too heavy to ship via Amazon's network. Meanwhile, some fund managers are increasingly convinced the only way to play consumer spending is to move away from brands and retailers and into logistics and supply chain companies, essentially betting e-commerce will render most consumer companies obsolete.
The challenge of investing in consumer companies comes at a time when the category would typically shine.
Low unemployment and a solid housing market boost consumer stocks, yet companies in the category - excluding Amazon - are up just 5.2 per cent for the year, or about 3 percentage points below the broad S&P 500 as a whole, according to Thomson Reuters data.
Amazon shares, by comparison, are up about 30 per cent.
Amazon now accounts for about 34 per cent of all US online sales and should see that number grow to about 50 per cent by 2021, according to a Needham research note.
Amazon's growing dominance is in some ways akin to the rise of Wal-Mart Stores in the early 2000s, when its rapid growth and move to branch out into groceries raised concerns it would put other retailers out of business. Yet Amazon's greater online reach and purchase of a top-shelf grocery store chain makes it far more formidable, said Barbara Miller, a portfolio manager at Federated Kaufmann funds.
"I've been in this industry for 25 years and this is the biggest transformation we've seen in the consumer space," she said.
While Wal-Mart put many small mum-and-dad stores out of business, Amazon is dragging down national competitors like Target and Macy's with its combination of low prices, broad range of inventory, and speed, she said.
At the same time, Amazon is expanding its e-commerce dominance when more shoppers are online, suggesting more pain ahead for competitors. E-commerce sales grew 14.7 per cent in 2016, nearly triple the 5.1-per cent growth rate of traditional retailers, according to US Census Bureau data.
Fund managers say Amazon's growing dominance is forcing them to shift long-held strategies, by either putting less money into consumer stocks overall or by focusing on companies that can compete alongside Amazon or may be attractive buyout targets.
The company's outsized 15.4-per cent weighting, more than double the next-largest stock in the S&P 500 Consumer Discretionary index, is problematic for fund managers who typically will not hold any positions greater than 5 per cent of their portfolio in order to manage risk.
Josh Cummings, a portfolio manager at Janus Henderson funds, is avoiding shares of direct competitors of Amazon, such as Target, Kroger, and Wal-Mart, and instead focusing on companies with "idiosyncratic" attributes, he said.
Starbucks, for instance, offers an experience that Amazon would find hard to match, he said, while Servicemaster Global Holdings, parent company of pest control company Terminix, is largely immune from e-commerce competition.
"Could Amazon decide they want to be in the business of spraying for bugs? It doesn't seem likely," he said.
Miller, the portfolio manager at the Federated Kaufmann funds, said she is moving away from stores that could be found in a mall, focusing instead on companies like Dave & Busters Entertainment and Wingstop that offer food-based experiences. She also owns shares of Camping World Holdings, which sells a mix of goods and services ranging from roadside assistance to accessories to the growing recreational vehicle market.
"This is a company with a strong membership base that has the sort of scale in its niche to rival Amazon," she said.
Jeff Rottinghaus, portfolio manager of the T Rowe Price US Large-Cap Core Equity fund, said he owns Home Depot shares because its stores essentially function as warehouses and much of its merchandise is too heavy or bulky to profitably ship quickly online.
Back to Breaking News