How to build a portfolio immune to the Amazon Effect

 

Few companies have ever managed to alter the world as much as Amazon.com (AMZN). Countless retailers have fallen since Amazon took over the e-commerce market, and brick-and-mortar retailers that have managed to remain relevant have only done so by investing heavily in their online businesses.

The Amazon Effect refers to the disruption Amazon has created in the retail space, thanks to the millions of products you can buy online, usually finding a cheaper price than in a store, and increasingly fast delivery times.

“Showrooming”, which refers to shoppers looking for products in stores like Best Buy, only to buy them cheaper on Amazon, has forced retailers of all sectors to adjust their pricing, invest heavily in their own online businesses, and alter the way they treat and approach customers to get them to make in-store purchases.

Amazon continues to grow in importance, and not all retailers are going to manage to compete and survive.

As such I love Amazon stock. While I believe AMZN is a must-own stock, you have to keep your portfolio diversified, so it is smart to make sure you have some stocks in your portfolio that are immune to the Amazon effect or have business models that can take advantage of Amazon’s growing importance.

Home Depot

Home improvement goods retailer Home Depot (HD) has a good chance to withstand the Amazon (AMZN) effect. Home improvement customers tend to prefer shopping in person versus online, and often need to consult with the employees at stores such as Home Depot to have their questions answered and to get some helpful hints on a specific project around the house. Home Depot has shown 18% annual earnings growth over the last five years and is expected to boost profits by 15.2% per annum over the next five years. While Home Depot’s products are partially insulated from the Amazon Effect, it is still very important for Home Depot to grow its online sales. During the company’s fourth quarter, online sales were up 21%, and for the full year it boosted online sales by 21.5%. The outlook is good for Home Depot, especially if it can continue to show the online sales growth it has recently. HD trades at $200.27 with an average price target of $208.48.

Visa

While Visa (V) may not be a retailer, it is a company that really stands to benefit from Amazon’s (AMZN) rise. As Amazon grows, so does the demand for payment processors to handle all the online transactions. Visa is a leading payment processor, and the company has showing amazing growth in recent years with earnings up 17.6% a year over the last five years, and analysts expect earnings will continue to rise by an average 18.1% per year over the next five years. Even without Amazon, consumers would be using their credit cards, but with so much retail now being done online, credit cards are being used more than ever, and at the end of 2017 the average credit card debt held by American households was at a record high. V trades at $135.09 with an average price target of $144.71.

 

Costco

Membership club Costco (COST) has a clear advantage over Amazon (AMZN) because most of its items are sold in bulk. The one big problem for Costco is that Amazon is moving into the grocery sector, which does pose a problem. One of the biggest reasons Costco has held up so well through the years is that it sells perishable grocery items. Amazon’s acquisition of Whole Foods could unsettle the grocery sector, but so far Wall Street does not appeared too worried about the merger’s impact on Costco. The stock has risen steadily in recent years, as Costco has managed to grow its earnings by 6.8% per year over the last five years, and analysts forecast the company will continue to grow its earnings by 11.9% a year over the next five years. Costco has also managed to do a good job growing its online business, with e-commerce sales rising 28.5 percent year over year during the most recent quarter. COST trades at $207.82 with an average price target of $212.35.

 

TJX Companies

Off-priced retailer TJX Companies (TJX) has one clear advantage over other brick and mortar retailers in that it offers deep discounts on name brand goods. The company also offers a good level of customer convenience since its stores are not buried in traditional malls. Convenience is one of Amazon’s (AMZN) major strengths, but with TJX stores typically located in shopping centers versus malls, customers can still conveniently park in front of its locations with ease. Consumer confidence is high, but customers continue to seek out value whenever possible, which is why discount retailers have remained so strong in recent years. TJX shares have steadily risen over the last five years as earnings have grown by 8.8% during that time frame. Looking ahead analysts see profits rising by 10.6% per annum for the next five years and have an average price target of $93.94 on the stock. TJX currently trades at $95.97.

 

Tiffany & Co.

Tiffany (TIF) is a high-end jeweler. The nature of the company’s products is what provides it immunity to the Amazon (AMZN) effect. Jewelry is one of the most personal shopping experiences. Customers want to touch and feel their jewelry before buying, especially when purchasing a large-ticket item such as a necklace or wedding ring. Amazon sells a lot of jewelry, but there will always be concerns of counterfeit items, and the underlying need of consumers to touch and feel their new jewelry. TIF is not a fast-growing company, but it has managed to grow earnings by 3.8% a year over the last five years, and analysts expect profits to rise by 10.9% per annum over the next five years. TIF trades at $136.64 with an average price target of $128.18.

Symbols: COST HD TIF TJX V
Michael Fowlkes

Michael Fowlkes

Michael Fowlkes is a financial writer who has been with the Fresh Brewed Media family since 2004. Over the course of his tenure with Fresh Brewed Media, he has worn many hats, including portfolio manager, options analyst, and writer. Michael received his undergraduate degree from Virginia Tech in Accounting and got his start in finance working as a stock trader for six years at Chase Investment Counsel in Charlottesville, Va.

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