In 2015, the prevailing sentiment on Wall Street was that Target was behind the curve in responding to the e-commerce threat and there was little it could do to fend off its loss of market share to Amazon, said John Zolidis, president and founder of investment advisory firm Quo Vadis Capital Inc.
Summary: The debate over the past year has considered on one hand consistently strong employment growth and consumer spending (2/3 of U.S. economic activity), and on the other slowing corporate earnings growth and risks including the impact of trade disputes, potential increased regulation for big tech (Facebook, Google, etc.), and actions of the Federal Reserve. The threat from the Fed was reversed early in 2019 when it pivoted to cutting rates (and thus providing stimulus) from raising rates. However, it wasn’t until last week with the signing of both the USMCA (United States Mexico Canada Agreement) and Phase 1 of a deal with China that 2019’s most powerful fear-based narrative on trade disputes lost its force.
While both Walmart and Target declined to provide details of their Miami operations, equity analyst and e-commerce expert John Zolidis said those two companies have found a way around building new distribution centers; instead, they rely on existing area stores where customers can quickly pick up their own packages at curbside.
“Our view is that if the company continues to innovate and create fantastic products it will maintain its dominance or grow share in existing or adjacent global categories” he says. “It will continue to produce excess free cash flows and these will either be returned to shareholders or reinvested in technology or growth. If all these things can happen, then $2 trillion is possible. Some day. So far it has been a smart to bet on AAPL’s continued success. “
Summary: The strongest consumer environment in our lifetimes, low interest rates, and ample access to capital underly the market’s favorable momentum heading into 2020, in our view. 2020 is an election year, which is typically disruptive to the consumer. Certain left-leaning policies would be very negative for economic growth, if they were to be enacted. Our advice is focus on 1) the strength of the consumer (whose spending represents 2/3 of U.S. economic activity), 2) the stability of the financial system, and 3) the innovative nature of U.S. companies and industries.
“The investment case for Walmart shares is aided by the favorable consumer environment,” wrote John Zolidis, president of Quo Vadis Capital. “However, the core reason to be involved, in our opinion, is based on the company’s ability to create separation versus competitors via the combination of enhancements to physical stores and aggressive investment in digital assets and order fulfillment.”
Summary: Markets pushed to new highs on the combination of better-than-expected earnings and stimulus from rate cuts, offsetting and providing a counterpoint to the slowing global growth narrative. The debate in the market over the last 12-months has revolved around the length of the current expansion, valuations, and the likelihood of a downturn in the economic cycle. While there are certainly reasons to be concerned, we continue to focus on the strength of the U.S. consumer. (Consumer spending is more than 2/3 of economic activity in the largest economy in the world, after all.) The consumer remains in a very good state due to the best job market in decades and modest-to-non-existent inflation. We also remain bullish on the innovative qualities of U.S. companies and we believe that access to capital (both for companies and individuals) remains good.
SHAK presentation Cyprus Value Investor Conference Oct 2019
The financial media remains focused on fear-related themes and potential for a recession, but we believe economic weakness can actually be good, if you’re invested in the right companies. On the other hand, the U.S. consumer remains very strong, and consumer spending is more than two-thirds of the U.S. economy. U.S. companies also remain very innovative and ability to raise capital is good. The main risk to global growth seems to be trade disputes between the world’s two largest economies, but, in our opinion, this is a war in name only. We continue to think it makes more sense to position for a positive resolution.
Street wear, for its part, has stepped up the pace, its drops occurring weekly, not annually or seasonally, and focused on goods with a shelf life of no more than a day, and prices that could strain the most lavish budget. To compare Target’s program with contemporary drops may seem a stretch.
“But the fact that we are talking about it in the context of Supreme shows that Target is doing something right,” Mr. Zolidis said. “If you’re a big box store selling groceries and diapers, and you can bring people in for designer goods at low prices in a limited-edition environment, that’s a coup.”