What do a pair of jeans and the US Postal Service have in common? Little on the face of it, but from an investment perspective, quite a lot. They are both second-order beneficiaries of someone else’s investment boom. The jeans manufacturer grew out of a dry goods business set up in San Francisco to supply the thousands of hopeful miners who flocked to California in the 1840s gold rush. The postal service, as President Donald Trump has inadvertently explained via his rants on Twitter, is one of the big winners from the Amazon-fuelled expansion of e-commerce.
Buying online requires some pretty sophisticated technology and logistical wizardry but getting your purchase from warehouse to doorstep is an old-fashioned process that looks very similar to any parcel delivery over the last century and more. It’s about cardboard boxes and a person in a van. One day that person might be replaced by a personalised drone, but for the foreseeable future, Amazon is dependent on Post Service Pat.
Neither Levi Strauss & Company nor the US Postal Service is directly investible, as one is a privately owned company and the other an arm of the US Government. They are, however, excellent examples of the lateral thinking that all investors should employ when looking for money-making opportunities. As Mark Twain may have once said: “In a gold rush, you want to sell picks and shovels.”
The thinking behind this well-worn adage makes statistical sense. Panning for gold was always a high-risk venture. You had to buy land at an inflated price in the usually vain hope that you would strike it rich. Most didn’t but many were tempted. Selling the tools and hard-wearing clothes that the prospectors all needed was a much safer bet.
Technological disruption is changing the world at an unprecedented pace and investors have, unsurprisingly, awakened to that fact. Trump’s assault on Jeff Bezos’s e-commerce giant may have wiped US$60 billion ($80 billion) from Amazon’s market value earlier this year but you’d be hard-pressed to notice this on a long-term share price chart.
Amazon’s shares have traced the traditional exponential path of all investment bubbles, turning left and heading up the screen in the last few years as investors have decided that Bezos’s behemoth is now unstoppable. That’s great if you have ridden the wave, as one of my favourite funds – Rathbone Global Opportunities, managed by James Thomson – has in recent years.
For the rest of us, sky-high valuations, regulatory threats and an unpredictable president make the obvious winners of the technological revolution look dangerously exposed. Investors today might be better off doing the lateral thinking that will highlight the new pick and shovel makers that will benefit from the disruption theme but at a less eye-watering price.
This is doubly important in the case of Amazon, because the company has fallen foul of the Trump administration’s determination to neuter The Washington Post. The newspaper is in the vanguard of the minority of US media holding the president to account and it just happens to be owned by Bezos. He is the only link between the news company and Amazon but it is the e-commerce giant’s shareholders who might pay the price for the association in the president’s mind.
An irony of Trump’s attack on Amazon is that the company does have many questions to answer – on tax, market dominance and the use of US taxpayer dollars to subsidise its ‘free’ shipping – but it may emerge from the president’s tweet-fest as a perceived victim and so avoid the scrutiny it probably deserves.
A second irony is that the president has failed to understand the ‘picks and shovels’ benefits the postal service has enjoyed as a result of its relationship with Amazon. While letter volumes in the US have fallen from more than 200 billion items in 2008 to 150 billion in 2016, the number of parcels delivered has soared, from 3.3 billion to 5.2 billion over the same period. Amazon accounts for nearly half of all e-commerce sales in the US, so the deal between the company and the postal service in 2013 (including Sunday deliveries) was a lifesaver for America’s largest non-military employer. No wonder the terms are secret.
Finding the next Levi’s is not always easy, for a couple of reasons. Many of the beneficiaries of technological disruption are not quoted companies and many of the victims are. My son, paying his way through university with a Deliveroo box on his back, is happy with the changes sweeping the restaurant sector. The mid-market chains like Prezzo, losing customers to the eat-at-home trend, are less pleased.
The other challenge is finding second-order winners at a sensible price. The yields on the hottest parts of the commercial property market – such as the warehouses springing up around the motorway network to service the likes of Amazon – are so low as to be firmly in bubble territory already.
Inevitably, many of the beneficiaries will be small businesses that we have never heard of. The headlines will be grabbed by the customer-facing brands while the hard work is done in the background by companies whose names are new to us. We will all have heard of Apple Pay but not the myriad technology businesses that enable it to manage payments and fight fraud. We all know that Netflix is spending billions on content but probably couldn’t name any of the studios funded by the streaming service’s huge cash outflows.
Some of the winners that are already major companies, businesses such as Oracle and Cisco, are off the radar because they produce things we don’t understand or particularly care about. But without their ‘picks and shovels’, the highly rated Amazons, Apples and Netflixes could never justify their high-octane valuations.
