AMAZON, WHOLE FOODS AND THE PEOPLE WHO LOVE THE DEAL

5/16/17

The big news in the markets today is the purchase of Whole Foods (WFM) by Amazon (AMZN).   This potential deal has roiled the entire retail industry, and hence I watched this development with more than the usual attention because I am a holder of Target (TGT).   I have been a holder of TGT for the last six months or so; with the little money I invest in anything but index funds, I like to buy stocks that have been beaten up, pay large dividends, and have been, in the case of TGT, increasing those dividends annually for the last 47 years.   While this strategy has not heretofore worked out with TGT, especially today, I intend to stay with what has worked for a long, long time for me rather than abandoning it in the wake of a one day, or several months, disappointment.  But I digress.

Yours truly is no expert in retail; as I said in the last paragraph, I bought TGT because it looked attractive based on some financial parameters I apply to stocks in any industry.  So as a non-expert, I have very little to say on the merits, or lack thereof, of the AMZN-WFM deal.  It does seem like AMZN paid a high price for distribution centers in an environment characterized by square miles of empty retail space across suburban and urban America.  Further, AMZN’s heretofore foray into food retailing has not been a raging success.    But Jeff Bezos is a heck of a lot smarter than yours truly and it’s easy to assume he knows what he’s doing.    Further, by buying Whole Foods, the kind of store that is regularly patronized by the Wall Street and Wall Street wannabe crowd, he has certainly garnered the enthusiasm of the crowd that can make his stock move up rapidly in the short run.  So far, this deal has been a success, but that is not the point of this musing.

What really got yours truly’s attention was the commentary on the deal by the learned experts on CNBC and in other quarters of the financial media.   On this morning’s episode of CNBC’s 11:00 (central time) trading show, we were told by the brilliant commentators that

·         Nobody shops offline any more.

·         The only reason that people go to grocery stores today is because they are either driving by a grocery store or need fresh produce, and

·         Investors don’t care about profitability; look at the relative performance of AMZN, which has only begun to be profitable in the last year or so, and TGT, which struggles to maintain single digit earnings growth.

Hmm…

I am far older than most of the experts on the panel on CNBC and, judging at least from appearances, am not nearly as successful financially as any of them.   But the notion that people don’t like to go to stores in a nation whose national pastime is neither football nor baseball but, rather, shopping, strikes me as preposterous.   Yes, “brick and mortar” retailing is in decline, but people don’t like physical stores anymore?   C’mon!   Equally silly is the notion that people don’t go to grocery stores unless they happen to be in the neighborhood or need fresh produce.   Even sillier is the notion that profitability doesn’t matter, but, again, it was a trading, rather than an investing, show on which these sages are appearing.

The larger point is that such notions are yet another manifestation of Wall Street’s tendency to see the world through its eyes and its eyes alone.   Swashbuckling, 7 figure Wall Street types who only began shaving in the ‘90s may buy everything on their electronic balls and chains, pay twice retail for fresh produce, even though it will spoil twice as quickly, because it is labelled “organic” or whatever the latest trendy characterization is, and “don’t have the time” to go to grocery stores, presumably because there is a tweet or a Snap or some other manifestation of technology inspired brain rot that demands an ever growing chunk of their time.   But ordinary people still like to shop in person and still go to grocery stores to buy items other than fresh produce.   And profitability or, more specifically, the ability to generate cash flow, is the only thing that ultimately matters to investors.  

Most Wall Street types suffer from profound and seemingly untreatable cases of myopia; they assume the whole world lives in a high rise in Manhattan, a trendy brownstone in Brooklyn, or a massive McMansion in Greenwich.  They assume everyone has the disposable income to buy what s/he wants rather than what s/he can afford.   And they tend to approach disposing of their massive incomes with the mindset of a yet to mature sheep.   When there are flaws in their analysis and the resultant trading calls they make, they usually arise from this very limited world view.

Does the AMZN/WFM deal make sense?   I don’t know and I don’t presume to know.   But the justification for some of the enthusiasm behind this deal makes me leery because it emanates from people who are completely out of touch with the typical American consumer.  

AMZN   $995.17

WFM     $43.27

TGT        $51.65

FORD MOTOR COMPANY AND THE TUNNEL VISION OF WALL STREET

6/16/17

I sent the following letter to the Wall Street Journal last month in response to a very insightful column by Holman W. Jenkins, Jr.   It was not published, but I thought my readers would appreciate the points, which certainly transcend Ford, that I made in this missive:

5/24/17

Holman W. Jenkins, Jr. (“Ford’s Turmoil is Not About Tesla, Opinion,” 5/24/17) rightly asserts that Ford’s future lies not in gee-whiz adventures like autonomous vehicles and new visions of urban mobility but, rather, in its “enduring strength in designing and assembling complex, consumer ready machines” while being ever mindful of capital efficiency and rationally maximizing shareholder value.

One can only hope that all the yammering from Mark Fields and Bill Ford about the whiz-bang technologies of the future was merely an unsuccessful attempt to appeal to Wall Street.   The analysts that populate Wall Street largely come from a narrow stratum of society that shares enthusiasms with all the introspection of sheep and assumes, incorrectly, that the general public thinks just like it does.  In an effort to please these types, car companies devote a little capital and lot more breath at shareholder meetings and ink in annual reports to things like autonomous vehicles.  Likewise, fast food giants boast of their efforts to improve the “natural” and healthy nature of their new menu choices.   Successful companies, however, realize that their typical customer doesn’t give a rat’s hindquarters about things like bespoke burgers made from exclusively organic ingredients, $100,000 third cars, and other trendy piffles that capture the imaginations of those who work on Wall Street for annual pay packages that exceed the net worth of the typical American.   These alert managements throw a bone to the Wall Street crowd and then go about the business of allocating capital to those products and services that actually sell and generate profits rather than capture rave reviews among the denizens of Wall Street.  Much to the amazement of Wall Street, this strategy usually works; look at the progress of McDonald’s stock once it de-emphasized sprouts burgers, or whatever the Wall Street crowd was panting about, and started serving calorie and fat laden breakfast throughout the day.  Look at the stock of Fiat-Chrysler, which has vastly outperformed its Detroit peers and the S&P this year while giving the faintest of nods to the latest science project daydreams of the Wall Street crowd and getting down to the business of building the Jeeps and Rams that capture the enthusiasm of people who don’t regularly drive to $20 burger joints in $100,000 Teslas.

One can only hope that the new strategy at Ford is to throw the crowd on Wall Street a bone by emphasizing the mobility aspect of Jim Hackett’s background while having Mr. Hackett do what he did at Steelcase…rationally allocate capital in the interest of delivering returns to shareholders today, not twenty years from now.  The danger for Ford shareholders and employees lies in the distinct possibility that Messrs. Ford and Hackett really believe that waiting for Ford’s science fair projects to pay off long after many of their shareholders are gone is a rational strategy.

Full disclosure:    I own some calls on F.

F              $11.15