One Simple Trade to Profit from the Amazon/Whole Foods Deal

Keith Fitz-Gerald Jun 21, 2017
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I made you some very specific promises when I started Total Wealth. Not only would we cover specific trading ideas and big trends, but we’d also dive into the specific tactics needed to maximize your wealth.

Today I’m going to keep that promise with a look at one way to trade Amazon.com Inc. (NasdaqGS:AMZN) and Whole Foods Market Inc. (NasdaqGS:WFM) right now using a Total Wealth Tactic I know you’ll love as much as I do.

What I really like about this trade is that it’s easy to understand and even easier to implement. And, it has the potential to profit no matter whether the markets go up, down, or simply sideways.

Best of all, though, there’s $1 trillion up for grabs.

Here’s what you need to know.

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Buying Whole Foods Signals Huge Profit Potential

Most investors view a deal like the Amazon/Whole Foods acquisition this a fait accompli for three reasons:

  • The $13.7 billion deal just gave other retailers an involuntary $50 billion buzzcut and pounded many of their favorite stocks in the process.
  • Amazon operates like a startup, which means a complete transformation of the grocery business they’ve counted on for years.
  • There was no warning, which means they “missed it.”

Yet, in reality, landmark deals like this one are just the beginning when it comes to ginormous profit potential.

Here’s my thinking.

First, the outmoded, outdated, and hopelessly inadequate grocery business is worth $700-$800 billion in this country alone. To say it’s ripe for disruption would be an understatement.

Second, buying Whole Foods gives Amazon instant control over approximately 460 retail stores where it can use expert supply chain management to maximize profits and test new retailing concepts that dramatically boost profits for the right stores while simultaneously clobbering any retailer without an “Amazon defense strategy.”

For example, a typical offline retailer can take nearly 270 days to make a price change, according to Intelligence Node. The average U.S. ecommerce site takes roughly one month to make a price change.

Amazon can do it worldwide in 2 minutes.

Wal-Mart sells roughly 17 million products, according to ScrapeHero, a top Data as a Service company. Whole Foods has perhaps a few thousand on offer…

Amazon sells 357 billion.

And third, “because you bought this” – a key Amazon merchandising strategy you see every time you order anything from Amazon – is about to hit an entirely new level of sophistication. It’s not hard to imagine buying fresh salmon, wasabi, and kale only to have Amazon’s algorithms hit your smart phone with recipes, related products, and reviews… in seconds… before you step out of the store.

In reality, the real end-game is anything but groceries.

It’s about your home and the big data that increasingly drives it.

Buying Whole Foods gives Amazon an instantly competitive platform to counter Google’s Express delivery service, which now covers 90% of the United States, according to company documents and reported by Time Magazine.

More importantly, I believe Team Bezos fully intends to use Alexa as some sort of digital butler – meaning you can say what you want to buy and it’ll be delivered lickety-split to your door anywhere on the planet, or waiting for you when you get there… together with gobs of other products carefully curated to reflect your idiosyncrasies.

I think the end result is something I call the “Home-Depot-fication” of retail shopping.

I believe that the total market is worth at least $1 trillion over the next five years if you factor in the total value of the grocery industry, the home automation market, and related data services that will make it happen.

The downside of all this, of course, is that there will be no more secrets.

Not yours, not mine… not Edward Snowden’s. Everything we buy or even talk about is going to be voluntarily given over in exchange for loyalty programs, personalized offers, and more. Personally, I find this incredibly disturbing but that’s a story for another time – and, of course, another investment opportunity I’ll cover in the weeks ahead.

Introducing a Total Wealth Tactic Ideally Suited for “WholeFoods-azon”

Most investors have never heard of a “pairs trade” – which is what you call a market neutral strategy used by many professionals to capitalize on situations like this.

Technically speaking, a pairs trade is a form of statistical arbitrage. That’s a $5 way of saying that it has two parts and that it’s the relationship between them that allows you to profit as the trade matures.

The trade was first pioneered at Morgan Stanley in the 1980s and usually involves two highly correlated securities. You buy one and short the other at the same time, creating a “spread.” Then, as one weakens and the other strengthens, the spread changes. And, that’s your profit mechanism.

Imagine, for example, Wal-Mart Stores Inc. (NYSE:WMT) and Target Corp. (NYSE:TGT).

Historically, the companies have tracked relatively closely, moving more or less in sync with market conditions. If Wal-Mart began looking too hot while Target stayed flat, a trader could buy Target stock while simultaneously selling Wal-Mart stock short.

If Target rose to “catch up” as is often the case in today’s highly computerized markets, the trader would make money on the Target stock. Or, if Wal-Mart stock began to slip, that very same trade is set up for profits having shorted the Bentonville giant.

Whether the markets rise or fall is moot once this trade is in motion. It’s the relationship between the two stocks that matters.

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Pairs trades have a number of key advantages…

First, pairs trades are great in rocky markets because they can help you control risk. It’s not uncommon, for example, to have both stocks in a pairs trade fall on a big down day. While that would clobber regular investors, pairs traders may remain completely neutral or even profit if the relationship changes in their favor.

Second, pairs trades are not market driven. They can potentially profit when the markets go up, when they go down or even when they go nowhere at all. Remember, it’s the relative performance that you’re after here.

Third, there’s almost no directional risk. Because a pairs trade always has one long and one short position, the first position is constantly hedging the second, and vice versa.

And fourth, because of the way they work, pairs trades can be very low cost or even no cost. It’s not uncommon for the short position, for example, to pay for the long. Margin requirements, as a related item, are typically much smaller, too because drawdowns are minimal by virtue of the fact that they’re always offset.

There is no doubt in my mind that Amazon is the real winner in this case and that every other retailer is the loser. I don’t care whether we’re talking Wal-Mart, Target, or even other grocers.

Amazon has so much cash, unprecedented access to big data, and years of operational logistical experience that the latter simply cannot compete.

This kind of market reaction reinforces my contention that Amazon’s stock price is far more likely to rise over time and at a faster pace than the broader markets just as has been the case since September 2016 when I recently encouraged Money Map Report subscribers to get on board for what I believed would be another marvelous run. Fortunately, that’s come to pass and everybody who’s following along as directed is enjoying a 2.05 to 1 advantage that’s seen their profits jump 30.39% versus 14.78% from the S&P 500.

It also suggests that other retailers fall behind. Grocers, in particular, are in real trouble because nobody the number of shoppers willing to put up with manual decision making, poor inventory management and – gasp – manual checkout lines will decrease. Ironically, Amazon struck again as I was finishing this article when it announced Prime Wardrobe and tanked both JC Penny and Nordstrom within hours.

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Here’s how to set up the trade…

Simultaneously buy Amazon.com Inc. (NasdaqGS:AMZN) stock and simultaneously sell short an equivalent dollar amount of the SDPR S&P Retail ETF (NYSEArca:XRT)

(An equivalent number of shares will not work so don’t mistakenly assume that 100 shares of Amazon will offset 100 shares of the retail ETF.)


As I write this, Amazon is trading at $994.00, so that means 100 shares will set you back $99,400.00 excluding commissions. The SDPR S&P Retail ETF is trading at $39.35. Consequently, you’d sell short roughly ­­­2,526 shares of the ETF ($99,400.00 divided by $39.35 equals 2,526 shares).

If you wanted to follow along with much smaller amounts, the math is the same. For example, let’s say you wanted to risk $1,000 on this trade. You could buy 1 share of AMZN (for $994.00) and sell short 25 shares of XRT, again not including commissions that vary from broker to broker.

As long as the retail ETF does, in fact, lag Amazon in the months ahead, the trade will make money.

Of course, the e-commerce king has gotten pricey from its historic run, and a share of Amazon now costs nearly $1,000 as I write. Naturally, this has left millions of investors looking for a “backdoor” entry to Amazon that doesn’t force them to choose between buying 100 shares or a house.

Enter T. Rowe Price Blue Chip Growth (TRBCX), the 26(f) program I’ve uncovered that lets you profit from Amazon for as little as $72 a share. If you’ve ever wondering what billionaire Peter Lynch, President Trump, and a Retired Cop from Northridge have in common… 26(f) “programs” are the answer. And even though most have no idea they exist, they could be worth $68,870 or more to the average American. [Continue reading…]

It’s worth noting that while we’re talking specifically about Amazon and competing retailers, you can use this pairs trade tactic for any company you expect to underperform the broader markets or a related index. We’ve talked about Volkswagen (OTC:VLKAY), Shake Shack Inc. (NYSE:SHAK), Zoe’s Kitchen Inc. (NYSE:ZOES), Twitter Inc. (NYSE:TWTR), Snap Inc. (NYSE:SNAP) and GoPro Inc. (NasdaqGS:GPRO) as being terrible investments in the past, for example. And they’ve all been great candidates for this kind of trade.

Are there some gotchas?

Yep.

The biggest is that the spread could narrow instead of widen. That means one or more of the positions go against a trader taking the bet I’ve described. The retail sector and grocers, in particular, could miraculously figure out how to compete against Amazon and that could cause their stock to rise faster than Amazon’s. A positive news story would do it, as would some breakthrough technology or rising public resentment against Amazon because it becomes “the establishment” as Starbucks Corp. (NasdaqGS:SBUX) did a few years ago.

Pairs traders typically have higher commissions because a single trade involves commissions on both sides. Remember, you’re buying and selling at the same time.

Then there’s slippage, meaning that a trader may not get exactly the fill he or she is looking for. Pairs trading can involve odd lots that are by their very nature more thinly traded, for example. Or, partial fills.

In closing, Pairs Trades, like our Lowball Orders, are a professional grade tactic you can use very effectively as an individual investor. Moreover, they’re tailor-made for the kind of situation Amazon’s Whole Foods acquisition creates.

Until next time,

Keith

 

10 Responses to One Simple Trade to Profit from the Amazon/Whole Foods Deal

  1. Steve says:

    You are a genius Keith ! Thanks !

    • Keith says:

      Good morning, Steve.

      “Genius” is a big word… I put my shoes on just like everyone else. However, thank you very much for the compliment. I will do my best to live up to it.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

    • Art says:

      Ty for this update ; seening more of you real soon .

  2. Rob says:

    I have a question here. What if Amazon stock drops and XRT retail go up ? Since you buy AMZN and short on XRT, you will lose $$ on both ends, am I correct or do I miss anything here ?

    Thanks,
    Rob

    • Keith says:

      Good morning, Rob.

      You are absolutely correct. That’s where the Unstoppable Trends come in. Amazon has proven that it is the one with the cash flow and, by virtue of that, the staying power. So while this is a risk, that’s why we use a spread (to help mitigate the scenario you describe).

      Good thinking!

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

    • Keith says:

      Thank you very much, Barry.

      Trust you are off to a great start this summer.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  3. Ernest Furgurson says:

    How high do you speculate/calculate Amazon will go ?

    • Keith says:

      Hello Ernest.

      That’s a tough call and one that’s impossible to answer – which is why you want to manage risk accordingly using things like the “free-trade” and trailing stops to protect your profits and your capital along the way.

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  4. R Joe Dunnam says:

    Possibilities of using a LEAP on AMZN and shorting XRT?

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