Mention traditional bricks-and-mortar retailing and most investors will point to depressed share prices, shuttered locations and – hello? – the Internet. Offer a bullish case for these stocks, and they'll call you crazy.
But this sort of reaction implies that traditional retailing may now be the ideal feeding ground for contrarian investors who believe that the infatuation with Amazon.com Inc. has left competitors' shares too cheap to ignore.
To be sure, some retailers' shares are cheap for good reasons: Sales have stalled, profits have plummeted and footprints have been shrinking.
Sports Authority has disappeared, Aeropostale and American Apparel assets were snapped up during bankruptcy protection and Sears Canada is insolvent.
Even the surviving retailers are bruised, during a time when the North American economy is doing fine. J.C. Penney Co. Inc.'s share price is down 57 per cent this year alone, Macy's Inc. is down more than 40 per cent, Target Corp. is down 19 per cent and Hudson's Bay Co. has fallen more than 50 per cent over the past two years.
But who says that this downward momentum has to continue forever? A bet that traditional retailing is going to survive should pay off handsomely if sentiment shifts from what looks like all-time lows.
For one thing, there appears to be a lopsided bet against the sector already, as short-sellers pile on. These investors borrow shares and then sell them, hoping to buy them back at a lower price somewhere down the road. In other words, they profit when shares fall – and weak share prices have apparently emboldened them.
In the case of some retailers, though, the number of shares sold short relative to the number of shares available for trading (the float) is absurdly high, suggesting that the bad news is already priced in.
At J.C. Penney, for example, shorted shares account for a whopping 47 per cent of the company's float. At Target, the ratio is also high, at 10.6 per cent. And at Macy's the ratio is 14.3 per cent.
Compare these double-digit ratios to Amazon.com, where shorted shares account for just 1.4 per cent of the number of shares available for trading.
Clearly, investors believe that Amazon.com can't do wrong and traditional retailers can't do right.
Analysts appear to agree. Among the 49 analysts that cover Amazon.com, 88 per cent have "buy" recommendations on the red-hot stock, according to Bloomberg.
For J.C. Penney, just 23 per cent of the 22 analysts covering the stock recommend it as a "buy."
And there's the media – yeah, that's right, us. In Canada, bad news stories on Hudson's Bay and Sears have been dominating retailing headlines this year, while The Atlantic recently carried a story titled, The Great Retail Apocalypse of 2017. Compare that to a recent headline in the Wall Street Journal: Amazon Takes Over The World .
So why step into the fray with an unpopular bet on traditional retailers? Simple: They're priced for death, but most won't die.
Consumers still venture into stores. In the United States, shoppers spent $3.4-trillion (U.S.) in 2016, excluding money spent on vehicles and fuel or in restaurants and bars. Within this total, online sales were less than $400-billion, or 15.6 per cent.
Okay, that's a lot of online sales, and the percentage is rising. But it's not everything, and it never will be.
Traditional retailers are going through a painful period of adjustment, closing stores if there are too many of them, and coming up with viable online strategies of their own. Successful ones will sell things not available elsewhere, entice shoppers with a good experience and perhaps even sell them products they weren't looking for.
You could invest in a broad exchange-traded fund, such as the SPDR S&P Retail ETF, which gives you exposure to 87 stocks, including Wal-Mart Stores Inc., Gap Inc. and Nordstrom Inc. This ETF is down nearly 11 per cent this year.
But for a bigger potential gain, and certainly more risk, consider swinging for the fences with just one stock. J.C. Penney anyone?