The art of investing is as much about choosing the right stocks as it is about avoiding the wrong stocks. The wrong stocks are ones that have performed poorly, have poor management or have looming dangers. It's that last point I'm going to focus on in this article.
The business environment is always changing and it's up to our companies to make sure they are adapting with the times. Sometimes these changes are just cyclical, which can still cause a problem for businesses.
However, there are times when companies simply can't change and slowly fade away. Physical book stores are a good example of this.
So it should worry certain Aussie businesses when the bane of bookstores, Amazon, is planning to arrive and take market share from many different sectors, not just books.
It is possible to succeed in this increasingly digital age, but businesses and management have to make brave decisions to try to do things differently and stay relevant.
The future of Wesfarmers Ltd (ASX: WES)
Wesfarmers is one of Australia's retail conglomerates with a market capitalisation of $46.6 billion.
It's the owner of several large businesses including Coles, Kmart, Target, Bunnings and Officeworks. Out of those four, I think Bunnings is the best one in its stable. It's just beaten off its main competitor (Masters) and it has growth plans to expand in the UK.
This can be seen by Bunnings' impressive same store sales growth of 8.1% during FY16. Kmart also had a good year, growing same store sales by 10.5%, whilst Coles grew same store sales by 4.1%. All of these numbers are pleasing, but I think Wesfarmers could face strong headwinds in 2017.
Aldi continues to grow and upgrade its store network, it is now expanding into South Australia and Western Australia. Older Aldi stores in Victoria, New South Wales and Queensland are being upgraded to provide a better experience, which will allow it to potentially attract more upmarket customers.
Another key danger to Wesfarmers is that Amazon is predicted to arrive in the second half of 2017. Amazon has been selling products that fall under Wesfarmers' umbrella at cheap prices in the USA and Europe, I imagine Amazon will bring a similar business model and product offerings to Australia.
However, Amazon would take time to build up distribution bases, so there's time for Wesfarmers to come up with a plan.
Kmart could be a bit more sheltered because the products they sell are so cheap that it would make the postage uneconomical for now, though if Amazon starts using delivery drones in Australia that may change.
Amazon is also growing its Amazon Fresh offering, essentially this is online delivery. Coles and Woolworths Limited (ASX: WOW) haven't really pushed their online delivery offerings in recent years – perhaps because they don't need to, they have such a huge network of stores they are close enough to all customers.
Amazon Fresh will still need to build up supplier agreements, advertise and so on, but if it takes just 1% market share, that will be taking potential sales away from Coles and Woolworths.
Foolish takeaway
Analysts have pencilled in 11.8% earnings per share growth from FY16 to FY18. This may be possible, but I think it's being very optimistic. If Wesfarmers achieves growth of around 6% over the next two years I think they will have done a good job.
Wesfarmers is trading at 16.7x FY17's estimated earnings with a grossed up dividend yield of 6.44%. These figures look reasonably attractive, but I think there is better growth at better prices in the market. I think Wesfarmers shares are much more likely to be lower than higher in two years' time.
I think Wesfarmers is a sell and it would be better to own these three great stocks in 2017.
