“CVS, Costco & Williams-Sonoma: The Amazon Extinction Myth”

Amazon [AMZN] is the world’s largest online retailer, with over $193bn in e-commerce sales over the past year. Everything seems to be going the company’s way: share prices have already risen almost 50% year-to-date; founder Jeff Bezos is the richest person in the world; and Wall Street analysts have near universal buy ratings.

For Amazon’s competitors, the outlook is rather dreary: The consensus narrative is that Amazon will continue exterminating businesses by infiltrating industries, taking share, undercutting price, and using scale to push other players out of the way. 

There is a lot of truth to this narrative. In 2017, more US retailers filed chapter 11 bankruptcy than 
in 2008 after the global financial crisis. That’s remarkable considering the US economy wasn’t even in a recession last year. Bespoke Investment Group even maintains a ‘Death by Amazon Index’.

“I am seeing potential opportunity in a host of names perceived as vulnerable to the Amazon extinction risk.”

But one lesson I’ve learned in my career is that there’s a tendency for widespread narratives, 
like this one, to get over extrapolated. I am seeing potential opportunity in a host of names perceived as vulnerable to the Amazon extinction risk. This is especially true in the retail space, where a few strong, quality companies are, in my view, trading below fair value. 

In 2012, I started back-testing every conceivable factor for predicting future stock returns and eventually pieced together a multi-factor model. Half of the model is weighted to quality factors 
that help measure the growth and risk potential of a security. The other half of the model is comprised of value factors that measure how cheap the security is. 

I’m continually adapting the model around the margin. But since starting this strategy I’ve 
been able to beat the S&P 500’s return with below-average level risk. Here are a few Amazon-survivor ideas my model likes, along with qualitative considerations:

“It’s virtually unheard of to see a big-cap trade at a single digit P/E, while the company is guiding for 16-20% earnings growth.”

Williams-Sonoma [WSM] looks like an undervalued retail play. Unlike many retailers issuing debt to keep the doors open, WSM carries little debt, and the firm has been investing in 
its e-commerce platform for years. This doesn’t make it bulletproof from Amazon disruption, but it certainly helps. WSM bounced recently, yet shares are still a bargain at 14-times forward earnings. 

Costco [COST] owns one of the highest quality brick and mortar operations on the planet. The wholesale giant is enjoying a strong same-store sales momentum while it expands its e-commerce platform to include grocery delivery and in-store pickup options. The stock isn’t cheap measured against its brick and mortar peers, but it’s a lot 
cheaper than Amazon, and an overall bargain.    

CVS Health Corporation [CVS] is an integrated pharmacy healthcare provider whose stock has been hit hard by Amazon fears. It’s virtually unheard of to see a big-cap trade at a single digit P/E, while the company is guiding for 16-20% earnings growth. If the company can string together a few beats in upcoming quarters, I can easily see the forward P/E mean reverting to its five-year average, which would imply a target stock price of $106. Shares currently trade at $68. 

About the author
Founder, portfolio manager and president of Silverlight Asset Management, an investment advisory firm serving high-net-worth private clients. He’s also a Forbes contributor and columnist for RealClearMarkets.

Michael Cannivet own positions in WSM, COST and CVS. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. 

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