Jun 30, 2017
U.S. fund managers seek consumer stocks that Amazon can't conquer
Jun 30, 2017
Amazon.com Inc's game-changing move to upend the grocery business with a surprise deal to buy Whole Foods Market Inc compounds a problem already vexing fund managers: how to play U.S. 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 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 percent 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 percent.
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Amazon now accounts for about 34 percent of all U.S. online sales and should see that number grow to about 50 percent by 2021, according to a Needham research note.
Amazon's growing dominance is in some ways akin to the rise of Wal-Mart Stores Inc 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 twenty-five years and this is the biggest transformation we've seen in the consumer space," she said.
While Wal-Mart put many small mom-and-pop 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 percent in 2016, nearly triple the 5.1-percent growth rate of traditional retailers, according to U.S. Census Bureau data.
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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-percent 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 percent 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 Corp, Kroger Co, and Wal-Mart, and instead focusing on companies with "idiosyncratic" attributes, he said.
Starbucks Corp, 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 Inc and Wingstop Inc that offer food-based experiences. She also owns shares of Camping World Holdings Inc, 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 U.S. Large-Cap Core Equity fund, said he owns Home Depot Inc shares because its stores essentially function as warehouses and much of its merchandise is too heavy or bulky to profitably ship quickly online.
Gary Bradshaw, a portfolio manager at Hodges Capital in Dallas, said he expects that portfolio holding Wal-Mart will become more aggressive in acquiring small, private companies to broaden its online reach.
The company announced a deal to buy men's wear company Bonobos for $310 million in mid-June, following purchases of outdoor gear retailer Moosejaw and online shoe store ShoeBuy. Wal-Mart acquired online retailer Jet.com in a $3.3 billion deal last August.
"They're going to do whatever it takes to compete with Amazon. They may be losing the battle at the moment but that doesn't mean that they will back down," he said.
Other investors are getting their consumer exposure by focusing on behind-the-scenes companies that power the growth of e-commerce.
Laird Bieger, a portfolio manager of the Baron Discovery Fund - the top-performing small-cap growth fund year-to-date - said he is focusing on companies like CommerceHub Inc, which works with companies such as J C Penney Co and Best Buy Inc to allow them to sell more products online and ship directly from manufacturers.
Craig Richard, a co-portfolio manager of the Buffalo Emerging Opportunities fund, said he has been buying Kornit Digital Ltd, which makes textile printers that can produce t-shirt and other apparel designs on demand, helping save inventory costs.
Amazon is Kornit's largest customer and has warrants to buy up to 2.9 million Kornit shares, about 8 percent of the company, at $13.03 a share over the next five years. Shares of Kornit, up 57 percent this year, traded at $19.95 on Friday.
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