WASHINGTON, October 17, 2017 – Online retail behemoth Amazon has been mounting (or threatening) fresh well-planned attacks on traditional bricks-and-mortar retailers with increasing frequency. Amazon first terrified America’s grocery chains with its surprise purchase of Whole Foods. Now, the very thought of Amazon entering the well-ordered world of pharmacy chains in search of prescription drug sales.
In both cases, the very mention of Amazon’s plans or alleged plans to enter a new retail sector has created instantaneous, massive, illogical and entirely overdone selling in the shares of related retailers. In this column, we’ll discuss how we’ve been trying to make money out of these absurd investor overreactions.
A couple of months ago, the shares of DIY giants Home Depot (HD) and Lowe’s (LOW) were taken out back and shot simply because Amazon.com (AMZ) had made an arrangement with Sears Holdings (SHLD) to sell the dying retailer’s still popular Kenmore appliances via Amazon’s ubiquitous web site.
Investors – but more particularly, that legion of mindless high-speed supercomputers that trade only on headlines – dumped shares of HD, LOW and Best Buy (BBY) as well because, well, because with Amazon deciding to sell appliances on line, Bezos’ Boyz would surely put HD and LOW right out of business, right?
On the whole, one rarely sees this kind of incredibly stupid mass-reaction in the market. Home Depot’s home appliance sales are, at the very most, roughly 7 percent of that company’s total sales annually. That means that Amazon’s entry into the consumer durables / major appliances arena would, at most, simply dent that percentage even on a worst-case basis, not wipe out the category entirely.
Furthermore, it’s unlikely that Amazon can capture Home Depot’s massive and growing business with contractors without building plenty of its own bricks-and-mortal locales to compete in this area. So it’s not likely Amazon will put Home Depot – or the similarly structured but not-quite-so-successful Lowes – out of business.
When Amazon purchased Whole Foods much earlier this year and immediately knocked down s selection of Whole Foods’ legendarily high prices once the deal closed, competing grocery chains were savagely hammered, and, to some extent, rightly so.
The supermarket business operates on famously low margins, given the constant, intense competition among chains for hard-to-attract, capricious and sales-driven consumer foot traffic. A sudden invasion by a notorious cut-price outfit like Amazon would put the fear of God into any competing business in this sector. And indeed it did. Even big, well-run chains like Kroger’s (KR) have yet to recover from the Amazon / Whole Foods hit.
This is likely the reason why, at least in part, why HD and LOW tanked, big time, when Amazon announced its deal with Sears / Kenmore. Obviously, the supercomputers and allegedly smart guys reasoned (for about 10 seconds), both DIY outlets would also be going right out of business. Sell!
Home Depot shares quickly sank from nearly $160 per share to roughly the high $140 per share range. We’ve learned from past experience that utter nonsense like this is an instant buying opportunity, all things considered. So we dove in and picked up a modest amount of HD shares in the $147 range.
Shares wandered around for a bit. But then, in an ironic twist, Mother Nature intervened, as Hurricanes Harvey and Irma proceeded to either level, drown, or otherwise wreck vast swathes of Houston and the main Florida peninsula. Once the clouds cleared, it was easy to see that both vast and important economic areas would be involved in a major rebuilding effort that will last anywhere from 6 months to two years.
And where will individuals and contractors be going to buy everything they need to repair homes, schools, businesses docks, outbuildings, you name it? Yes, right answer: Home Depot and Lowes. (Which is why we picked up some shares of the latter, too.)
We also picked up shares in lumber purveyor Louisiana-Pacific (LPX) earlier this month as well, for pretty much the same reason. HD and LOW have to get that lumber from somewhere.
At the moment, our shares in HD are up around 10 percent, while Lowe’s shares are up a somewhat less impressive 4 percent. LPX is just getting started and isn’t yet too sure of itself. We’re only up about 2 percent here.
HD and LOW have weakened somewhat this week due to selling pressure and, most likely, profit taking. That’s fine, but we think HD in particular has some room to run once we get the Nervous Nellies out of the way. If Lowe’s doesn’t perk up soon, we might just take the modest profit and run.
HD and LOW may be peaking mid-term, so we’ll keep an eye on them. On the other hand, another Amazon-inspired bit of nonsense showed up last week. The company announced it was “exploring” the possibility of getting into the business of selling prescription drugs.
What happened next? You guessed it. Shares of CVS (CVS), Rite-Aid (RAD) and Walgreens Boots Alliance (WBA) were instant casualties, with all three getting splintered within minutes of the announcement and continuing to sink through Monday’s close.
Near the end of last week, for a variety of reasons, we decided to buy into Walgreens in stages, picking up what will likely be our final batch of shares near Monday’s close. While our position is up 16 cents today, we’re down about 2.3 percent on this position at the moment. But that’s the way it worked for us with HD and LOW, too.
Stocks don’t generally recover from a bad hit right away. So it will be with WBA. We expect this position to look anemic for a bit before it begins to perk up again. Even the sainted Jeff Bezos, a one-man retail wrecking crew if there ever was one, is going to find the highly regulated prescription drug business more difficult to navigate than even Whole Foods and the entire supermarket conglomerate, low-margin challenge.
Bezos will either decide against it – likely against his competitive nature, but not out of the question. Or he’ll need to spend far more time getting into the prescription business than he’s used to. And in so doing, he’ll immediately run into companies like WBA and CVS that already either own or have arrangements with mail order prescription outfits anyway. So this “takeover” of the prescription drug business by the rapacious Amazon might not exactly be the slam dunk the high-speed computers and short sellers think it will be.
If it happens.
Fingers crossed, meanwhile, for our new position in WBA. We might not be able to replicate our current success with HD and LOW. But with that big price drop, it’s sure worth a shot.