What are we looking for?
Companies that will potentially benefit from a renegotiated North American free-trade agreement.
The screen
Renegotiations between Canada, the United States and Mexico begin in Washington over NAFTA. Most of U.S. President Donald Trump's gripes with NAFTA in its current form stem from his protectionist stand. However, there is a free-trade initiative that he is pushing on Canada and Mexico that would benefit Canadian and Mexican consumers. Americans are able to import $800 of goods bought online duty-free. Mexicans only get a $50 allowance, and Canadians have one of the lowest thresholds in the world at only $16. Mr. Trump's administration is pushing both countries to raise their limit significantly to match the United States' limit. It's easy to see how this would be beneficial to Canadian and Mexican consumers, but also U.S. online retail giants such as Amazon. We screened for U.S. retail companies that would benefit from this proposed change.
- Our universe for the screen will be companies in the Thomson Reuters Business Classification (TRBC) Retailers business sector, which are headquartered in the United States.
- To drill down on companies that would benefit from relaxed import duties specifically pertaining to goods bought online, we look for companies whose online sales account for at least 90 per cent of their total revenue, or whose percentage of online sales has increased by at least 2 per cent over the past year.
- Finally, to make sure we’re not buying companies with overstretched valuations, we use the Starmine Relative Valuation Sector Rank. This ranking system gives each company a percentile score based on how attractively valued it is (based on enterprise value multiples, price multiples, dividend yield and other factors) relative to its sector. We eliminate any company that scores below 75. This eliminates companies such as the aforementioned Amazon, which has a forward price-to-earnings ratio of more than 250.
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What did we find?
The screen delivers seven companies, including one that generates 100 per cent of its sales online. EVINE Live is in a business that could do very well if import taxes to the North and South are relaxed. The company sells a wide range of consumer products – jewellery and watches, electronics, home decor, fashion, cosmetics – through TV, online and mobile channels.
Williams-Sonoma is another interesting story. As bricks-and-mortar retailers have struggled over the past few years, Williams-Sonoma has been steadily increasing the amount of business it does online. Furthermore, the furniture business could do well over the next few years as millennials finally spread their wings and move out on their own, and unemployment numbers drop. The question is whether they will have an appetite for high-end furniture, or if they will tend toward value brands – as has been the case in the apparel business.
L Brands is attractively valued, and its brands – Victoria's Secret, Pink, Bath and Body Works – are well suited for online shopping and international shipping.
Hugh Smith, MBA, works in the financial and risk unit of Thomson Reuters and specializes in wealth and asset management.