California is the home of tech stocks.
Google [NASDAQ:GOOG], Facebook [NASDAQ:FB], and Oracle [NASDAQ:ORCL] all call California home.
They are among the biggest technology stocks on the market.
Your editor’s hotel here in San Diego is just a stone’s throw from the HQ of another tech giant, Qualcomm [NASDAQ:QCOM].
Tech stocks took a beating on Friday when the NASDAQ index fell 2.6%. Today the NASDAQ index fell 1.6%.
Is this the end of the technology stock rally? Is this dot-com bust mark two? Is it time to go back to good old-fashioned bricks and mortar?
Based on our experience here in Southern California, we wouldn’t be so quick to draw that conclusion. Given the choice, we’d happily buy technology stocks at these prices and sell a group of stocks that really are at death’s door.
It’s advice that translates well to the Australian share market too…
The mainstream has been falling over themselves to draw attention to last Friday’s tech stock slump.
For some time we’ve heard the wailing about crazy-high valuations.
Much of that attention has focused on another US west coast giant (Washington state-based) Amazon.com Inc [NASDAQ:AMZN].
Even though the stock has fallen 19% since the start of the year, it’s still trading at a price to earnings ratio (PE) of 552-times. That’s expensive by anyone’s standards.
But here’s the important thing. It’s not just about how a stock’s value shapes up today, it’s about where the valuation could be in the future. That’s why even with a PE of 552-times earnings, we’d rather buy Amazon.com stock than the stock of another group of companies.
Buy for a bargain or short sell to zero?
On this trip to San Diego we’re staying in the La Jolla (pronounced La Hoya) area, a northern suburb about 15 minutes from downtown.
Naturally, we’ve spent some time checking out the area, including the nearby Westfield [ASX:WDC] owned UTC open air shopping mall.
As far as malls go, it’s a great combination of mall and ‘high street’ shopping strip. It’s easy for parking, and there’s a good variety of stores, as you’d expect from a typical ‘high street’ shopping area.
Of course, as with any mall, there are always the ‘anchor tenants’. In this case it’s the big department store retailers Sears [NASDAQ:SHLD], Macy’s [NYSE:M], and Nordstrom [NYSE:JWN].
After spending 20 minutes wandering through each of Macy’s, Sears and Nordstrom, we came away with the feeling that the stock of these companies must be either a rock-bottom turnaround play (the type that Jason Stevenson looks for in resource stocks) ready for a contrarian investor to pounce, or that they are ripe for short sellers to beat them into the ground.
We would only know the answer for sure after checking out each company’s recent stock price movements, and their financials.
Even favourable demographics can’t help these stocks
In terms of stock price performance, it turns out it has been a mixed bag:
Over the past five years Sears has fallen 20%, Nordstrom has gained 185%, and Macy’s has piled on an amazing 476%.
If we can put that in perspective for a moment, Amazon.com stock has climbed 358% over the same period.
In terms of financials, Amazon.com generates about three times as much revenue as Macy’s. Amazon.com’s revenue for the last financial year was US$74.5 billion. However, using the same financial year, Macy’s generated a profit of US$1.5 billion compared to just US$274 million for Amazon.com.
Now, although current revenue and profit is important, as a stock investor it’s more important to consider the future.
Let’s go back to our brief experience in these three department stores on Saturday. The UTC shopping mall was a hustling and bustling throng of people of all ages. As an open-air mall it was a perfect shopping day with the temperature in the high teens.
The queue for the craft beer festival in the mall’s centre square was a good 60–70 metres long. And most of the individual stores appeared to have good foot traffic and plenty of ringing tills.
We can’t say the same for the three department stores. While the demographic of shoppers in the rest of the mall spanned the age spectrum, in the department stores the average age was 60-plus…if not 70-plus.
But that wasn’t the biggest problem. With an ageing population, you could argue that the ‘old way’ of shopping is here to stay. But it’s not. The atmosphere in the department stores was more like a morgue than a thriving retail experience.
Most of the old folks appeared happier flitting in and out of the specialty stores along with the rest of the crowd rather than facing the risk of tripping over frayed-edge carpet and travelling on rickety escalators.
So what’s our point?
There’s more to a stock story than PE ratios
It was just a coincidence, but it was an appropriate one. While strolling through Westfield UTC we noticed the big video display showing the latest news.
It announced that Amazon.com was launching a delivery service to ship fresh produce to people’s homes.
Amazon.com — the company that almost singlehandedly helped to destroy book retailing, and which is in the process of killing off department stores, is now taking aim at another branch of retailing, grocery stores.
In short, yes we get it that Amazon is trading at a crazy valuation, but PE ratios don’t always tell the full story. Macy’s current PE is 15-times earnings. By any conventional comparison it should be easy to say that Macy’s is a buy and Amazon.com is a sell.
But looking at current PE ratios isn’t always the best way to value a stock. You have to do more than that. You have to consider the future. It’s clear the old department store style of retailing is reaching an end.
It’s happening here in the US, and it’s happening in Australia too. Retailing is at a key juncture. Consumers have spoken. They want two things. They want smaller, boutique style specialty stores where they can browse and find unique things.
And most of all they want an efficient online experience. That’s what Amazon.com gives its customers, and generally, it’s what the traditional department stores don’t.
We know which stock we’d rather own.
Cheers,
Kris+
PS: Small-cap analyst Tim Dohrmann recently touched on a similar point in Australian Small-Cap Investigator. In the monthly issue he highlighted a tiny company that could become the ‘Amazon’ of the Aussie market as it ramps up its local online business. It’s an intriguing story and a great opportunity that has only just become available to Aussie investors. Click here to find out how to get the inside scoop on this tiny Aussie success story…
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