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Daily Intelligence Briefing

Tuesday, November 17, 2020

Identifying Change-Driven Investment Themes – Five sections, explained here.

The Daily Intelligence Briefing is published by McAlinden Research Partners. The report is provided to Hedge Connection blog readers once per week for free. Below is just one of the five sections that delivers Change-Driven Investment Themes everyday.


I. Today’s Thematic Investment Idea

A deep dive into a market driver with alpha generating potential.

Holiday eCommerce Boom Could Ignite Online Retail and Package Carrier Stocks

Summary: Though overall retail sales growth is expected to slow this holiday season, ecommerce purchases are forecast to soar by 30% or more. Retail giants and logistics firms alike have been bulking up their infrastructure in preparation for a tsunami of online sales that is likely to suprass available transportation capacity. This will likely create delays and rising costs for package carriers in the short-term, but 2021 is expected to herald greater pricing power and profitability throughout the industry.

Related ETF & Stocks: ProShares Long Online/Short Stores ETF (CLIX), United Parcel Service, Inc. (UPS), FedEx Corporation (FDX), Deutsche Post AG (DPW.DE)

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eCommerce Boom Echoes Through the Holiday Season

Though some are expecting a softer holiday sales season than in previous years, mostly due to COVID-induced financial constraints on many consumers, a monumental shift in ecommerce demand is assured.

Though eMarketer expects in-store holiday sales to decline by 4.7%, US consumers will spend $190.47 billion this year on holiday ecommerce purchases, up 35.8% and representing an incremental $50 billion in sales versus 2019. Cyber Monday, the online version of Black Friday, may see blowout growth of 38.3% to a record $12.89 billion.

In fact, the ecommerce growth is so robust that online gains may entirely cancel out brick and mortar losses. Because of ecommerce, total holiday season sales are expected to eke out growth of 0.9%. That would put the total spend at $1.013 trillion.

Similarly, in their 13th annual holiday ecommerce prediction, NetElixir forecasts aggregate ecommerce sales to experience a 30% annual increase in November – December 2020, with total online sales in that period likely to exceed 20% of total retail sales in the US.

Adobe Analytics, which measures sales at 80 of the top 100 U.S. online retailers, is in line with the latter two predictions, forecasting a total of $189 billion in online holiday sales, a 33% increase compared to last year and the equivalent of two years-worth of holiday e-commerce sales growth shoved into one season.

As we head into that critical holiday season, there has already been a significant amount of underlying ecommerce strength through October.

New data from ACI Worldwide, showed a 23% increase in global eCommerce transactions in October 2020 compared to October 2019. This increase was driven by the retail, gaming, DIY and digital sectors as consumers prepare for further lockdowns.

If the Chinese market is any kind of leading indicator for ecommerce adoption and sales in the US, those optimistic expectations could certainly be met or even exceeded. Beginning on November 11, Alibaba’s Global Shopping Festival –  a 2 week-long version of the usual Singles Day event – brought in RMB498.2 billion ($74.1 billion) in gross merchandise volume over the 11-day effort, a 26% increase from 2019, according to a press release emailed to Retail Dive. Interestingly, The US was the top-selling country by gross merchandise volume. The online sales event drew about 800 million consumers.

In addition, ACI’s data, based on hundreds of millions of eCommerce transactions from global merchants, showed a projected 25% increase in volume of transactions for all sectors combined (including those impacted by the pandemic, such as airline and ticketing) in Q4 2020 compared to Q4 2019.

Per SupplyChain Dive, Amazon announced plans over the summer to increase the square footage in its fulfillment operation by 50%. RBC Capital Markets observed that much of the growth in Amazon’s network is taking place with delivery stations, the facilities closest to the consumer.

To combat Amazon’s latest expansion, combined with the downturn in foot traffic at brick and mortar locations, retail giants have been scaling up their ecommerce operations in anticipation of “the new normal”. Walmart is going on the offensive by re-organizing space in 42 of its regional distribution centers to create “pop-up ecommerce Distribution Centers” meant to help handle the increased volume of online orders.

Per a Deloitte consumer survey, 35% of respondents chose in-store pickup as their preferred method of delivery, and 27% picked curbside pickup. However, a larger number of respondents (73%) than both of those answers combined said they were likely to use standard delivery over the holidays. Another 43% selected same-day or next-day delivery by a retailer.

Package Delivery Volume Boosts Supply Chain Pricing Power

Through autumn, on-time performance for ground services has managed to regain ground it lost in the early days of the pandemic when delays for non-essential products were routinely stretching out to two weeks or more. ShipMatrix Data for the month of October highlighted the USPS’s strong service levels, with First-Class on-time performance at 96.6%, in line with the 94.8% and 97.9% readings for FedEx and UPS, respectively. 

Last month, DHL Express said it expects e-commerce shipments to grow more than 50% from last year’s peak leading up to the holidays, with a similar spike in inbound volumes to the Americas ― most of it in the US. The company said it is prepared for the surge in volume, thanks to regular investments of about $1 billion per year in its network. For 2020, it has hired more than 10,000 permanent employees, including 3,000 in the US. For their part, FedEx will hiring 70,000 workers, while UPS is in the throes of hiring more than 100,000 temporary employees.

Despite the ramp up in hiring and expansion, Satish Jindel, the president of ShipMatrix, predicts 7 million packages a day could face delays from Thanksgiving to Christmas. The firm estimates that total shipping capacity for the industry will be 79.1 million parcels a day during that period, compared with 86.3 million packages looking for space. Last year, total capacity was just 65.3 million packages with 67.9 million looking for space.

While rising volume is a boon to parcel carriers’ valuations over the long term, short term effects on company financials can be a mixed bag. UPS earnings, for example, rose 10% to $2.28 a share with sales up 16% to $21.24 billion last quarter; the third onsecutive quarter of accelerating revenue growth.

The problem, however, is that a rising home deliveries, in comparison to more lucrative business deliveries, compressed profits and tightened margins. The remedy for that is greater pricing power for package delivery. As UBS analyst Thomas Wadewitz wrote in a recent note to clients, he expects “significant pricing gains” for UPS and rival FedEx in Q4 and into 2021. “For UPS, we also expect new cost takeout and efficiency programs in 2021 to support meaningful margin expansion in the large domestic package business,” Wadewitz added.

Back in September, when MRP originally added Long Package Carriers to our list of themes, we noted that Credit Suisse had just turned bullish on UPS for the first time in years, upgrading the stock to outperform from neutral. Stifel analyst David Ross also upgraded FedEx to the equivalent of buy from hold around the same time, raising his price target for the stock to $281 from $175.

″It’s possible that we’re at the front end of a multi-year pricing cycle in parcel that could be transformative to both FedEx and UPS. If we are, there is a reasonable bull-case in which FedEx’s share price can double to $500,” said Citi analyst Christian Wetherbee.


When MRP added Long Clicks/Short Brick and Mortar Retail to our list of themes on April 20, 2020, our rationale was that COVID-19 would tilt consumers more deeply towards ecommerce and that the impact on shopping habits would be long-lasting. We are re-affirming that theme today. 

Investors can gain exposure to the theme via the ProShares Long Online/Short Stores ETF (CLIX). CLIX’s underlying index is built from two sub-indexes, one long and one short. To be included in the longs, a company must draw none of its revenue from physical stores and must be listed on a US exchange, though it is not required to be a US company. For the shorts, in-store sales need to account for at least 75% of revenue, with the same US exchange requirements as the longs.

Since we launched the theme, CLIX has returned +30%, outperforming the SPY’s +27% gain over the same period.

Meanwhile, we launched our Long Package Carriers theme on September 28, 2020. Since then, our package carriers basket , comprised of UPS, FedEx, and DHL, has returned +1% thus far, underperforming the S&P 500’s return of +7%.


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