Tuesday, July 25, 2017

WMT AMZN TGT and all that Jazz

7/25/17 This is not going to be a post about AMZN vs. WMT. The answer to that is simple. Buy both, but at the right price. If AMZN drops below 900 or WMT below 70, please wake me up! Until then, keep in mind there are macro forces working in their favor.

8/15/17 So what about Target? They have their issues, but they are too big, too well positioned to write them off. As other retailers fail, it makes a bit more space for Target. They are giving this immediate gratification, (Next day delivery etc), a close look and not just looking. Buying a shipping/logistics company! WSJ reports they are hiring the skills they would need: "Target is hiring former executives from General Mills (NYSE:GIS) and Wal-Mart (NYSE:WMT) to help bolster its food and beverage business. "Across all categories of our business, we are investing to build an even better Target (NYSE:TGT) for our guests," said Mark Tritton, executive vice president and chief merchandising officer. "We have been making positive progress with our assortment, presentation and operations."" Target is currently selling for 55.00. I am not big on the impact of earnings on stocks, but this is their chance to explain what their next steps are.

7/25/17 TGT is down almost 28% for the past 52 weeks. They need to make some major moves soon. However Morningstar, (A rating), shows they have a lot of debt. That could make that juicy dividend hard to fund over the next few years. I doubt they are a good long investment and possibly will be more market share for AMZN and WMT.

I was really struck by Table 1 of this Obama presidentially funded report. No matter what your politics are, the fact that consolidation in the Transportation and Warehousing and Retail Trade industries has increased over 11% from 1997 - 2012 should get our attention. Same old story, mom and pop companies edged out, a few big strong players such as AMZN and WMT in retail when the smoke clears.

But who is winning the Transportation and Warehousing world? This is not my area of expertise, but right off the bat UPS and Fedex come to mind. Walmart does their own thing, (another moat factor). Schneider is private. So, let's add Roadway, Yellow, C.H. Robinson, and Crete as a starting list on the trucking side.

I know less about warehousing then trucking.  Google, at least, seems to equate "warehouse" to "logistics", since this is just a notebook, we will go with that for the moment. This webpage claims to list the top ten and we have to start somewhere: C.H. Robinson, Echo, Transplace, Ryder, UPS, J.B. Hunt, Kenco, Penske Logistics, Unyson, Seko, Menlo, Landstar.

ACTION: setting a Google alert for C.H. Robinson and need to get on some mailing lists to understand the Transportation and Warehousing sector better.


7/25/17 This post was formerly titled: "The Big Box and Mall Retail Shopping Crisis"

UPDATE: 6/3/17 this notebook entry started out focused on Sears, but I realize that the entire retail industry is strongly affected.

For years, many would argue since 2004, Sears Holdings, (Sears and K-mart) have been faltering. They are now at death's door. The Washington Post has a great story about the fall of Sears. As of June 2, SHLD has lost almost 45% of its value. 6/13/17 SHLD has announced they are cutting 400 jobs. Conventional wisdom is still that Seritage Growth Properties (NYSE:SRG), a real estate investment and has interests in 266 properties, most of them from Sears Holdings.

Since the REIT was created in 2015, financial pundits have been claiming that as Sears Holding decreased, the REIT would increase by leasing the closed properties. Recently, we have seen some, "I'm not so sure" posts. This is because malls are closing, CNN Money reports that 25% of the malls will be closed in five years. If this is true, who will lease SRG's properties, (SRG is down over 10% in the past 90 days)? Sears Canada, (SHLD is an investor), is running out of money and must borrow to remain operational for another year. Since these are mall stores this also affects Canadian REITs. 6/22/17 WSJ reports Sears Canada about to file bankruptcy.

There are really only a few questions that matter.

- Is the combined Sears and K-mart market share enough to matter? Do they command enough of the market that someone can profit from their demise. Six years ago I would have said yes, today, not so much. 6/8/17 Sears is closing 72 more stores leaving 1,200 down from 2,073 five years ago.

- Is online retail the future or even the present? BusinessInsider predicts 8 - 12% growth in online retail in 2017. Globally, Amazon Inc., Wal-Mart Stores Inc. and Apple Inc. are the top 3. A better way to look at purchase future is high-value. This 1/5 of customers account for 50% of sales and that is a long standing rule of thumb.

- Is the overall decline in big box brick and mortar and the malls that host them a major factor? USA Today has a thought provoking piece. For a real downer Market Watch is comparing brick and mortar to the oil and gas industry. CNN Money says, "Brokerage firm Credit Suisse said in a research report released earlier this month that it's possible more than 8,600 brick-and-mortar stores will close their doors in 2017. " McKinsey says that just selling doesn't work, the mall has to be an experience, (take with a grain of sand, shopping at Wal-Mart can hardly be called an experience, that is back to value.).

6/30/17 Motley Fool had this to say about Costco, "Management is willing to give up short-term profitability to keep its subscriber base thrilled with the shopping experience. Its 2% net income margin puts it far below other retailing chains, but has been a key driver behind its unusually high sales growth."

NPR carried a piece on the malls in danger, "LEINBERGER: It's the middle-market malls that are in biggest danger of going dark. The fortress malls - those huge, you know, 1-and-a-half-, 2-million-square-foot malls like the King of Prussia Mall outside of Philadelphia - those are fine. But it's the ones anchored by JCPenneys and Sears that are and will go increasingly dark."

I did find an author that claims physical space is "coming back", "But physical space is reinventing itself. Malls continue to focus on "experience" versus "things". The example he gives is PEI who has lost 54% of their value in the past 12 months. The author may be right, eventually, but I am betting against physical space in the short term. Have you ever seen what happens when the asphalt of the parking lot starts to give way?

- Who is the "dark horse", the unknown that will benefit from the change in shopping habits? Online retail!  If you focus on Amazon, most people say Wal-Mart, the number 2. If you focus on Wal-Mart most people say Target, which doesn't make any sense to me, but bears investigation, (they are profitable, have an attractive P/E and a decent dividend, (as of 6/1/17 TGT is down almost 20%, they also have more debt than I like to see, but they are managing it so far.).

Like any other investor, when I see a downdraft, I know there must be an updraft somewhere. Even though I am mostly invested with low overhead Vanguard index ETFs at this point, we still have a bet on Amazon, (five year Google Finance AMZN chart below).

















But going back to Sears Holdings CEO Ed. Lampert's Seritage thesis. As the market currently stands physical shopping centers, home of the declining big box stores, are ideally located, and at least at the moment, believed to be valuable real estate. If Sears Holdings unravels too fast for Seritage to take advantage then what? It isn't just Sears/K-Mart, Macy's, JC Penney, Kohls, J Crew, etc. are closing stores fast, see Clark report for comprehensive list. Nordstrom just released a PR expressing interesting in going private. It is worth pointing out that Wal-Mart goes it alone as opposed to anchoring malls. In some cases, the chains are going bankrupt. 6/20/17 Amazon Prime Wardrobe hits JC Penney and Nordstrom, (does anyone actually buy clothes at JC Penney other than kids to small to fight back to school?)

Retail jobs crisis. 

And what about the people that work in those stores? Retail, according to marketwatch has shed 30,000 positions over 12 months. BusinessInsider reports, "The US administration has focused its rhetoric on coal and manufacturing jobs. However, it's notable that the number of workers in general merchandise stores who have lost their jobs since October is greater than the entire number of people employed in the US coal industry." And yet we do not hear the furor that we hear from manufacturing and coal. But it can't remain silent much longer as it is impacting the economy. What other industry needs the skills of retail jobs? There are already "transition" articles appearing, but this one sounds like a rehash of retail. Some of them will end up in Amazon fulfillment centers, but retail is spread across the country and fulfillment centers are strategically placed.

It does not seem like there is enough demand for Stein Mart, Hobby Lobby  and Five Below to reuse many of the big boxes. Empty big boxes can be adapted for churches, after all, most mall parking lots are not full on Sunday morning, however it requires a church with solid funding, (if you were a loan officer, would you make a loan to a church), in need of a big building.  Looks like another case of a big opportunity looking for a bigger idea. Oh well.

Dark Horse revisited, online retail.

Rather than rehash Amazon and Wal-Mart, what are the categories of items being purchased online?  According to EngageCustomer, "The top five products bought online in the last 12 months were books (63 per cent), clothing/footwear (61 per cent), DVDs (54 per cent), CDs (43 per cent) and beauty & healthcare products (32 per cent)."



Wednesday, July 19, 2017

IBM (taken from Es Tech Stocks)

8/8/17 The first limit order hit, so we now have a position with IBM. Want to really keep an eye on things for the short term to see about adding to the position.

7/23/17 I moved the purchase price down and reduced the amount of shares. New initial purchase is 143.02 which is below the 52 week low. Second tranche is at 140.02. Thesis: I still believe they are a good company, better priced than most of the tech and their strategic initiatives are in the right place. I think the turn around is going to take longer than they had hoped for. The goal remains to make a significant investment of my family's money, but at the right price.

Rather than recount declining quarters YoY, dividends, stock buybacks and free cash flow, here is a great article that summarizes my concerns late July 2017 and why I dialed the purchase back to be more conservative: https://seekingalpha.com/article/4089704-ibm-anatomy-value-trap

But in all the gloom and doom I need to remember something. IBM is a technology company, or at least they used to be and with the purchase, I am betting they still are. Tech companies create products that have value out of seeming thin air - like blockchain. Betting against Watson in my view is a big bet.

7/22/17 IBM continued to drift down slightly through the week, we are approaching the 52 week low. After a lot of thinking, I think holding to the 145.02 plan is the good choice, it is very likely to hit in the next few weeks. Maybe even being more conservative than that makes sense. We have benefitted from a very long bull market. My Vanguard ETFs are heavily loaded towards GOOG, FB, etc. But IBM for all of its issues seems to be the best value buy of the tech stocks large enough in grow iteratively. I realize I should be looking for a diamond in the rough, but I should not turn down a Steady Eddy.

I try to do my own research, but as I am getting close to the trigger point I notice most of the industry research says hold or neutral, (though the e-trade blogger sentiment says bullish); possibly another vote for being even more conservative?

7/19/17 IBM dropped very near my limit on earnings reports. I think I had better do a change order, moved it to 145.02.

6/1/17 Set a limit buy of 145.01 to re-establish a position with IBM, which used to be my largest holding. However, that was in basket Cs and got sold in the Vanguard ETF/Muni change. That turned out to be a blessing, IBM's stock price has dropped over $10.00 since then with a high water mark of 182.79.

Truthfully, the chance of hitting 145.00 seems a bit low based on recent markey performance, but some thoughts that might be downward pressure:
- May 5 Warren Buffet sold 1/3 of his position in IBM dropping it from the 158 zone to the 152 zone
- IBM pension plan is dumping IBM
- Essentially 20 consecutive quarterly expected revenue shortfalls, (we can debate accounting practices later),
- Tech, in general, might be overpriced, macro factor, IBM however, is pricewise one of the better buys in tech,
- They are in transition from services and product to cloud and cognitive AI and the growing as we approach earnings on 7/18/17 analysts will be expecting the new parts of the company to grow.

IBM Thesis, (or at least wild hope). IBM is a company fraught with contradictions. My hope is that my family can establish an initial position on a dip, add to that carefully and then profit as some of the emerging businesses start to establish and prosper.  IBM for us has been a long investment so this is not a short term strategy. There is little doubt that there is some financial trickery involved at this point, if they can get their revenue mojo back on, I suspect all will be forgiven.

Watson, I am going to start tracking Watson separately, it could be the major driver
- IBM Watson and Sesame Workshop team
- Watson cancer and Hackensack team
- Watson goes to Wall Street for financial legal compliance


Things to research:
- What if 145 is too high once Wall Street gets more data priced in *falling knife*. Consider splitting the buy L145, L140, L130 or some such, once the supercomputers kick in this could happen in a wink
- Impact of new 5nm chips, will not affect stock in 2017, but surely by 2019
- Stock buybacks propping up the stock price
- IBM debt in general
- Can they really keep upping the dividend
- R&D investment lower than peers incl cloud providers MSFT and AMZN
- Spectra believes IBM will have all the mag tape business
- IBM Cloud, WhatsApp leaving the IBM cloud, Forbes impressed, now includes identify as a service,
Cisco/IBM teaming
- IBM's glass door ratings, 6/21/17 cutting contractor hours,
- X-Force is expanding to Poland,
- Is Watson their future or a marketing campaign, IBM teams with Hortonworks for analytics, they are having a go at the weather,
- IBM and blockchain, teaming with AIG for smart insurance, working with Euro banks, trucking industry,