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    The Retail Sector Belongs To Logistics

    Remember when computers first starting hitting the retail market? All the big tech players, the chip makers in particular, were the big dogs.

    They were the masters of the technology that made things go. They created the machines that built the first-, second- and third-generation personal computers and then created routers and modems to help turn the Internet into something we now access on our phones and tablets.

    But from then to now, something happened to the big dogs. While they were punching out circuit boards and semiconductors and commanding premiums for their products, the world shifted a bit.

    The premiums you could charge diminished. The early Apple Inc. (AAPL) years were a living metaphor for this. As PCs flooded the market and more and more chipsets were being built in Taiwan and Japan, fewer people were willing to pay up for Apple products. And because Apple never licenses its technology, new computer users were asked to pay up or find another product.

    But this transition wasn’t just affecting Apple. Memory chip/disk makers were having a tough time increasing memory to run and store the increasingly larger programs. Connections were expected to become faster and faster, and prices for all this were expected to get lower or, at the very least, remain the same.

    The underpinning technology became commoditized. From magical machines with intrinsic values to equipment that could be measured by performance stats and production costs alone, the industry was changing.

    Nowadays, we’re much more savvy regarding new technological advancements. And until recently, only Apple had any “hip factor” included in analysts’ pricing models.

    IBM (IBM) has shifted its focus to “middleware” (the burgeoning sector of getting various software packages to work across systems) and more knowledge-based systems work.

    Texas Instruments, Inc. (TXN), Intel Corporation (INTC) and Advanced Micro Devices, Inc. (AMD) best exemplify the shifting industry. Texas Instruments and Intel were icons through the 1980s and ’90s. They are now mature business kicking off dividends and paddling like hell to stay current, which brings us to AMD. It’s slowly getting overtaken by the competition and likely won’t survive this final onslaught of new companies and new technologies eating into its operating space.

    What Does This Have To Do With Retail?

    The point I’m trying to make here is that even the most dynamic and revolutionary business sectors end up as mature or maturing business models that get commoditized. If the underlying business aren’t capable of adapting to new competition and a more dynamic business model, then they are like a wandering moose separated from the herd when the wolves move down the mountain.

    That was my point last week when I wrote about traditional retailers going up against online retailers in A Holiday Season Opportunity.

    Traditional retailers have huge overhead costs due to their brick-and-mortar business model. This means they need to keep margins razor-sharp or add some extra value to the experience.

    Recently, traditional retailers have been dropping lines of products produced by online retailers to make sure they aren’t relinquishing any advantage to online stores. For example, Target Corp. (TGT) and Wal-Mart Stores Inc. (WMT) stopped selling Amazon.com Inc. (AMZN) Kindle readers in their stores.

    And a current iteration in the retail space of the early Apple is J.C. Penney Co. (JCP). It is 100 years old this year, and it looks like it won’t see its 101st year. It’s missed much of the online branding and has struggled to find a niche in the dissolving department store space, much like Sears (SHLD) and Kmart before it.

    But instead of trying to buy advantage during the current retail turf wars, now is a great time to buy into one piece of the retail business that is guaranteed to grow: delivery and logistics companies.

    You see, it doesn’t matter if you’re a traditional retailer or an online one; you have to get the products to customers. The smart traditional retailers are looking to online sales to help grow margins in their operations, and the online retailers will be selling more and more regardless of what happens to their brick-and-mortar counterparts.

    There are two other reasons to look to this sector.

    First, international delivery companies like FedEx Corporation (FDX) and United Parcel Service, Inc. (UPS) have been hurt by their global business. Stock prices are down because Europe and Asia have slowed, there’s increasing competition in the Mideast and the United States has been lagging.

    But those trends are changing. And no one is interested in buying into the transition until they see it in the quarterly numbers, which is always too late for the individual investor. If you’re worried about having your money tied up until something happens, remember that FedEx is kicking off a dividend yield that’s better than most CDs and that UPS has an almost 3 percent yield.

    Second, the U.S. economy is slowly getting to its feet, and the transports are showing signs of life domestically. To play the retailing shift as well as the domestic improvements, look to trucking and logistics companies that have solid core businesses and are diversified enough to take advantage of improvements in a number of transport niches.

    Two companies that fit the bill are Old Dominion Freight Line Inc. (ODFL) and JB Hunt Transport Services Inc. (JBHT). Both firms are well-diversified trucking and logistics firms with specific niches that helped them weather the economic downturn well and position them for lots of upside as the U.S. economy begins to gain traction. Even in a mature economy like the United States’, there is still plenty of opportunity for smart companies that can exploit the niches.

    — GS Early

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