Most stocks suck. I have been saying it for a long time. It has nothing to do with markets, or even with the economy.
Last week, Foot Locker (FL) reported terrible results. Shares in the athletic-apparel and -shoe retailer slumped 28% on Friday alone.
However, according to management, there is no need to worry. Nothing to see at all.
But, they’re getting killed by Amazon (AMZN). And they don’t even know it, or at least acknowledge it.
To most people, “death by Amazon” is obvious. They see surging online sales for athletic gear. They see the same metrics falling at Foot Locker. They connect the dots.
Yet, with the stock down 51.5% year-to-date, FL’s CEO Richard Johnson told analysts the company was continuing to invest in “compelling experiences for its customers”. He later mused about how premium customers prefer their in-store experience.
Forget the fact that foot traffic is collapsing at shopping malls across the country. Same-store sales at Foot Locker were down 6% year over year. Johnson is ignoring cold, hard facts.
And shareholders are suffering.
In April, The New York Times reported Amazon is set to become the biggest apparel retailer in the United States later this year.
For the sector, it is a bitter pill. As the online giant rises, it leaves scorched earth in its wake dotted with shuttered stores, empty malls, layoffs and bankruptcies.
Later this year it will leapfrog Macy’s (MA), the current leader. The beleaguered chain is set to close 100 additional locations. Many of these stores anchor suburban malls.
The very same malls that Foot Locker depends on for foot traffic.
To make matters worse, in July, Nike Inc. (NKE) announced it would finally begin selling its products directly on Amazon.
For a long time, NKE resisted because of its unique relationship with retailers. Times change. Third parties are already selling its goods online. And that’s eroding margins.
Nike had to make a choice between fortifying existing ties with traditional retailers or moving away from wholesale to maintain margins. Reluctantly, it chose the latter.
Even Nike’s business model was disrupted.
And that’s the lesson. That’s why most stocks suck.
If management is not working tirelessly to innovate and build moats around its business model, that model will be disrupted. Period.
Foot Locker is in a tough spot. Its customers are shopping online. Now its biggest supplier aims to compete directly, too. Its business model is being disrupted, and corporate managers seem oblivious.
Sadly, heedless managers are all too common.
That’s why I believe investors should avoid most stocks. The best opportunities are unheralded businesses with focused, provably capable managers. They find profitable niches and leverage their advantages to keep competitors at bay.
These opportunities are hard to find. I have a list I share with the members of my services. It’s pretty short.
My list includes companies that make water heaters, distribute electricity and make pizza, as well as some other niches you rarely read about.
It’s not glamorous. They simply mint cash flow. And take good care of shareholders.
And they don’t suck.
One of the few retailers on my list is Costco (COST).
It has managed to forge its own unique path to profitable growth without depending on malls, or on buying competitors, or on cutting margins.
Like Amazon, customers love it enough to buy memberships, which are in turn a major factor in the company’s profitability. It may not ultimately hold off Amazon, but it has the best shot.
Best wishes,
Jon Markman
