Several weeks ago, I shared my views on Blue Apron (APRN) . My take at the time was investors should avoid this falling knife that was bracing for more competition as it likely heads toward a round of financing. That is a recipe for pain, and, at least to me, it's no surprise that APRN shares have fallen another 35% since I last discussed them on Nov. 1, and more than 41% since I first detailed my concerns.
Little has changed in terms of the two issues Blue Apron faces, so my opinion remains that investors should fish in more fruitful waters, favoring companies that have strong tailwinds pushing on their businesses and solid balance sheets that offer flexibility to strategically grow.
There are several other companies that have been labelled "radioactive," which to me means they are not only too hot to handle, but require "special equipment" if one had the risk profile to invest in them. Candidly, I understand that some investors look for potential turnarounds that could eventually pay off -- the "home run," if you will -- but are others, like me, prefer to sleep at night and track data points that serve to guide how and in what we invest.
I also prefer companies that have products and services that drive and support a business rather than features that can be easily copied by competitors. Two examples of what I consider features are Fitbit (FIT) , which has seen its shares fall 27% over the last year as Apple (AAPL) continues to improve its Apple Watch, which now includes LTE connectivity in its latest model; and Snap (SNAP:Nasdaq), which has seen its offerings copied and enhanced by Facebook's (FB) Instagram. Snap shares are down roughly 26% from their March IPO price and likely would have been down more if not for the capital lifeline it received from Tencent (TCEHY) .
Another strategy is to avoid companies that are hitting pronounced headwinds, better known as competitive forces moving against a company's business. Each month's retail sales report shows data that support the accelerating shift toward digital commerce. Case in point, per the October report, the October report, Nonstore retail sales rose 8.5% year over year for the three months ending October 2017. That compares to 4.6% for overall retail sales and 0.1% drop at Department Stores for the same time period. This is clear evidence of wallet share gains by Amazon (AMZN) and the digital businesses of companies such as William-Sonoma (WSM) and Walmart (WMT) .
As this shopping shift is occurring, we are also seeing Amazon build its own private-label offerings across a growing number of categories, including sportswear, electronics and accessories to kitchenware. This is placing additional pressure on bricks-and-mortar names such as J.C. Penney (JCP) and Sears (SHLD) . The shares in those two companies are down 55%-60% year to date, but there is reason to think there is more pain on the way as traditional retail businesses are pumping up the use of discounts to win business, which should further pressure margins.
In a survey conducted by the Berkley Research Group of more than 100 high-level retail executives in October, 64% of the respondents said they expected promotions to play a more significant role in overall sales during the 2017 holidays. What this tells me is there is more trouble ahead for retail as these companies sacrifice profits to win revenue -- not exactly a sustainable business model and one that tends to lead to declining earnings per share.
My view is this: No matter how cheap shares of J.C. Penney and Sears look, there is more room for downside as they continue to struggle against the digital commerce tailwind.
So, what are some examples of companies that I do like and that are performing?
One is USA Technologies (USAT) , which we added to the Stocks Under $10 portfolio this past April as a play on mobile payments. As the company has expanded its customer base and the number of vending locations using its solutions, USAT shares have soared 89% over the last seven months.
Another stock we like is AXT Inc. (AXTI) which joined the Stocks Under $10 portfolio in June, and has since climbed 35%, given the growing demand for RF semiconductors as mobile connectivity finds new opportunities beyond smartphones in the connected home, connected car and Internet of Things markets.
The shift to mobile payments from cash, check and cards, and the growing number of connected devices are both pronounced tailwinds that are poised to push the business models and stocks of both those names even further in the coming months.
This commentary was originally sent to subscribers of of Stocks Under $10 on Nov. 20, Click here to learn more and subscribe to this portfolio and market analysis product, co-managed by Chris Versace and Stephen Guilfoyle.
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