By Justin Spittler, editor, Casey Daily Dispatch
Adapt or perish.
That’s what Amazon’s telling some of America’s biggest brands. Oddly enough, the online retailer offered this ultimatum in an invitation to its Seattle headquarters.
The company wrote…
Times are changing…
Amazon strongly believes that supply chains designed to serve the direct-to-consumer business have the power to bring improved customer experiences and global efficiency. To achieve this requires a major shift in thinking.
Jeff Bezos, Amazon’s founder, sent this note to General Mills, Mondelez International (formerly Kraft Foods), and a number of other marquee U.S. brands. He did this because he wants these companies to rethink how they do business.
According to Bezos, these brands are spending too much time thinking about how to sell their goods in Wal-Mart and Costco when they should be focusing on how to sell goods on Amazon.
Now, companies have these kinds of conversations all the time…but you have to understand something.
• Bezos wasn’t asking these giant corporations to change their business…
He was telling them…
You see, Bezos is a ruthless businessman. He’ll do whatever it takes to grow his empire.
In this case, he’s trying to drive a wedge between America’s top brands and the big-box retailers that sell them.
It’s an ambitious goal, to say the least. But Bezos isn’t someone you want to bet against.
After all, Amazon’s already conquered bookstores, electronics stores, and department stores. Now, it has Wal-Mart and Costco in its crosshairs.
Today, I’ll tell you how Bezos plans to take out these retailers. Let’s start by taking a closer look at Bezos’ “ultimatum.”
• Bezos wants companies like General Mills to change how they package and ship goods…
Bloomberg Markets reported in March:
Amazon is looking to upend relationships between brands and brick-and-mortar stores that for decades have determined how popular products are designed, packaged and shipped. If Amazon succeeds, big brands will think less about creating products that stand out in a Wal-Mart Stores Inc. aisle. Instead, they’ll focus on designing products that can be shipped quickly to customers’ doorsteps.
There aren’t many companies in the world that could get away with something like this. But Bezos and Co. have a ton of leverage.
For starters, Amazon has more than 300 million customers. So General Mills has almost no choice but to work with Amazon.
Not only that, Amazon can produce its own products if a company doesn’t want to work with them.
It’s actually already doing this on a huge scale.
• Amazon is rolling out private labels left and right…
In its most basic form, private labeling is the act of buying inexpensive products from one company and selling them for a markup under your own brand.
Amazon has done this with a number of products including linens, electronic devices, yoga mats, and about 1,200 others.
In some cases, Amazon has completely taken over the market. Take batteries, for example.
Amazon now accounts for about one-third of this $113 million market. As if that weren’t crazy enough, its online battery sales are practically doubling every year.
Then there’s baby wipes. Amazon controls about 16% of this market. And sales of its Amazon Elements wipes are growing at around 266% per year.
Soon, the online giant will sell nuts, teas, and other perishable items under the Amazon brand name.
• This is great news if you shop on Amazon…
It means lower prices.
But Amazon’s private label business is a huge threat to companies like Wal-Mart and Costco.
You see, Amazon is basically cutting out the middleman by producing its own products. General Mills and other big-name consumer staples obviously can’t allow that to happen. That would cut them off from hundreds of millions of customers.
This leaves them with no choice but to play by Amazon’s rules.
In short, Bezos is pitting America’s biggest brands against traditional big-box retailers. It’s a brilliant strategy, and yet another reason why you shouldn’t ever bet against Bezos.
Keep this in mind if you own Wal-Mart or Costco…as these companies could run into serious problems in the coming years.
• You should also consider picking up shares of Amazon if you haven’t already…
As you’ve seen today, it’s steamrolling the competition and showing no signs of slowing down.
Of course, the big knock on Amazon is that it’s expensive. The stock trades at a price-to-earnings (P/E) ratio of 182. That makes it seven times more expensive than the average large-cap U.S. stock.
This would normally be a huge red flag. But you have to understand something about Amazon.
It’s traded at a steep premium for years. And all it’s done is crush the market.
Just look at the chart below. You can see that Amazon’s soared 363% over the last five years. That’s more than quadruple the S&P 500’s return over the same period.
Bezos’ plan to crush big-box retailers will only make Amazon even more dominant. So consider picking up Amazon as a long-term holding if you don’t own it already.
Delray Beach, Florida
May 25, 2017
A Lesson in Risk Management
I want to share some recent feedback from one of our readers. It serves as an important reminder to always follow our risk management advice.
In the March 31 Dispatch, I said that we could be looking at a serious moneymaking opportunity in dry bulk shipping stocks. At the end of that issue, I shared three of my favorite stocks in the sector for readers to check out. Unfortunately, the call was a little early…and one of our readers took big losses:
Based on recommendations from Casey Research, on April 3, 2017, I invested in Navigator Holdings Ltd. (NVGS) and Star Bulk Carriers (SBLK). As a Platinum Member, I’ve come to trust the recommendations you make. However, as of the close of the markets on Friday, May 12, I had a loss of 30.97% on NVGS and a loss of 35.79% on SBLK. This is a considerable loss in only 5 weeks. I would appreciate your comments on the relatively near future of the dry bulk market before I sell the two stocks above. I’m retired and 77 years old and I don’t have the time to wait years in the hope of the dry bulk market turning around. For this reason, please give me your estimate of how long you believe it will take for me to at least break even on the two stocks above.
—Hans, Casey Platinum Member
Thanks for writing in, Hans. As I mentioned, there were several things you needed to know before loading up on shipping stocks. Here’s what I said, straight from the issue:
The shipping industry still has big problems. Despite the recent rally, shipping rates are still near record lows. And the industry still has too much debt and too many ships. The good news is that these problems aren’t nearly as bad as they were a couple years ago.
Shipping stocks are extremely volatile. They can swing 10% or even 20% in a day. If you can’t stomach those kinds of violent moves, this might not be the opportunity for you.
In short, you shouldn’t treat shipping stocks like an investment. They’re a high-risk speculation.
• Here are three ways you can manage risk…
Be smart about position size. Don’t bet your retirement on shipping stocks. Only speculate with money that you can afford to lose.
Limit your downside. You can do this with stop losses. These will automatically sell a position if it falls below a certain point. With something as volatile as shipping stocks, we recommend a 50% trailing stop.
Spread your risk. Don’t buy just one shipping stock. Buy a basket of them.
These warnings should not be taken lightly. Especially with speculations, you should only be using money you can afford to lose—and you should have a strict exit plan in place.
We still think shipping stocks can expose you to huge returns. They’re a great bet for speculative money, but again, they’re extremely volatile.
While we can’t give a specific time period for when they’ll rebound, we can say that everyone who hasn’t already needs to start implementing a risk management plan today, for all of their investments. It’s vital to your success in the markets.
For more on this, I urge you to check out the work by our good friend Richard Smith. Richard is a mathematics PhD and the founder of our corporate affiliate TradeStops. He has built a fantastic set of tools that help individual investors diversify and manage risk in their portfolios. Learn more right here.