Stock of the week: Trading Black Friday, but not as you know it
This Thursday is the US Thanksgiving holiday, which can only mean one thing, Black Friday. The annual shopping “holiday” that takes place the day after Thanksgiving, typically kicks off the start of the festive shopping frenzy, and analysts are expecting a significant pick up in sales compared to 2020. The National Retail Association in the US is expecting 2 million more Thanksgiving shoppers than 2020, and this could be good news for more than just the traditional retail names in the US.
Let the shopping frenzy begin
Retail sales jumped 1.7% in October, and a good proportion of these sales were early holiday sales. Economic momentum is picking up in the US as we move towards the end of the year, and although inflationary pressures and the prospect of higher interest rates are weighing on consumer confidence, we expect retail sales to be given a major boost this week. A mixture of supply constraints and a desire to celebrate Christmas in 2021, after 2020’s celebrations were curtailed by Covid, is driving people to buy more earlier, which could be good news this Black Friday. However, the problem that we have with retail stocks is that a lot of this good news is already priced in. For example, the SPDR consumer discretionary ETF for the S&P 500 is up nearly 40% this year, on the back of record highs for stocks including Home Depot. While there has been some downward pressure on consumer stocks in the past week, mostly down to investors worrying that inflation pressures will weigh on future profit margins post the Q3 earnings reports for stocks including Walmart and Target, we continue to think that the retail sector looks expensive at its current level, and we are not looking to get exposure to this sector at this stage.
Buy Now, Pay Later to be the big winner from Black Friday
As you can see in the chart below, the SPDR Consumer discretionary ETF has approached key resistance that could trigger some profit taking in this sector in the near term. This is why we prefer to look beyond the traditional retailers to get exposure to an exuberant US consumer and a blow-out Black Friday. We are interested in the payments sector and the ‘Buy Now Pay Later’ (BNPL) phenomenon, which we think will explode this Black Friday. Looking at BNPL first, analysts have noticed that consumers are buying more ahead of the festive season due to supply fears, and they are buying earlier. This means that they are likely to have bigger orders and to spend more. For those without a credit card, for example many young people, and for those shoppers enticed by the BNPL 0% interest rates, then BNPL is a very attractive option from a trading perspective. The BNPL stock that stands out as we head into Black Friday is Affirm, a Nasdaq-listed stock. We think that there will be a large increase in transactions funded by BNPL this Black Friday, which will make the BNPL providers more attractive to the e-commerce giants like Amazon. Affirm may have reported a first quarter loss that was larger than analysts had expected earlier this month, however, it also posted an 84% increase in volume. It also announced an expansion to its relationship with Amazon, and last month announced that it would be available on Target’s website as a payment option. Its shares surged earlier this month to more than $172, however, they have since declined sharply to $136. We believe that a strong Black Friday for the BNPL industry could see Affirm bid back towards the $150 per share mark.
Don’t write-off all of the Payments providers, especially this Black Friday
Elsewhere, we also think that Black Friday will be positive for the disruptors in the payments industry. Last week Visa, the old guard of the credit card/ payments world, came under attack from the investment community after Amazon said that it would stop accepting Visa for payments in the UK because their fees are too high. This is something that Amazon has already done to Visa in Singapore and Australia. This news sent Visa shares to a 10-month low, and there could be more downside to come. The way that we pay for our purchases is changing, and we expect this to be in the spotlight this Black Friday. It is worth noting that the payments sector has come under immense downward pressure, as the market narrative has generally been negative: too much competition, too many disrupters and BNPL is a major threat to payments firms. However, we think that PayPal and Mastercard (as an alternative to the beleaguered Visa) could benefit in the short-term from a surge in spending this Holiday Season, and this is why you should not right off the payments sector right now.
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