Bloomberg
Amazon.com Inc. has proven to be unstoppable, regardless of which new industry it enters.
But there’s at least one thing the internet retailer won’t be able to touch, according to Stephen Lee of Logan Capital Management: strong brands.
“It is getting to the point where if customers are less likely to walk into a store, brands give you an advantage because people buy what they know,” Lee said in an interview with MarketWatch.
Lee is a founding principal and growth portfolio manager at Ardmore, Pa.-based Logan Capital Management, which has about $2 billion in assets under management, mainly in individual accounts opened through financial planners.
The company runs mutual funds to complement its offerings. The Logan Capital Large-Cap Growth Fund was established in 2013.
Lee cited three companies that his clients are invested in that he thinks are protected against Amazon.com :
Nike
Lee is impressed with the ability of Nike Inc. to keep its product lines fresh while “developing a unique ability to reduce the time from innovation to market.” Part of this effort is the company’s investments in greater automation and new factories closer to its markets to cut transportation and related expenses.
Lee is also impressed with Nike’s increased focus on selling to customers online. For the third quarter of fiscal 2018 (ended Feb. 28), the company’s total sales increased 6.6% from a year earlier to $8.98 billion. Sales through Nike Direct totaled $2.61 billion, increasing 14% from a year earlier and making up 29.1% of the company’s total revenue. A year earlier, direct sales made up 27.1% of total revenue.
Despite its increasing reliance on online sales, Nike’s brand is as important as it has ever been to retailers, Lee said, in part because of the consolidation brought about by the demise of Sports Authority. He also said the company’s new relationship with Amazon.com is good, because it allows “more control over what is sold online,” which helps Nike maintain pricing and the strength of its brand.
Estée Lauder
The idea of keeping pricing power and good relationships with retailers is important for Estée Lauder Cos. which Lee said is benefiting from growing demand for cosmetics “with all the photos being posted online.”
Estée Lauder “has leading brands and has done a really good job of controlling distribution and maintaining the pricing power,” Lee said.
He explained that the company was “protecting key providers” by not underselling its brick-and-mortar retailer distributors of its products when selling its own products online.
Logan Capital Management
For some cosmetics, consumers still want the in-person experience to make decisions. But for favorite products that need to be refilled, Estée Lauder’s online convenience can help it maintain customer loyalty.
Estée Lauder’s net sales for the quarter ended Dec. 31 were up 17% from a year earlier to $3.7 billion. The company didn’t break out online sales. However, it said sales in online and specialty-multi channels “grew [by] strong double digits.”
Constellation Brands
Constellation Brands Inc. distributes beer, wine and spirits, with Corona and Robert Mondavi among its best-known brands. The company’s sales for the fourth quarter were up 7.9% from a year earlier to $1.77 billion. Those figures weren’t affected by any significant acquisitions. However, the year-earlier figure was reduced by $23 million to reflect divestitures in Canada. The company’s “consolidated organic net sales” for beer in the fourth quarter were up 12% to $998 million, while its similarly reported sales for wine and spirits were up 8% to $769 million.
Lee likes Constellation because of its “good brands, solid market, significant barriers to entry and very good demographics.” He also said the company was doing a good job “maintaining craft beer brands.”
Strategy, Amazon and a bit of irony
Lee said Logan Capital’s growth strategy is to select companies that have management teams “that are focused on their mission, have unique products and pricing power and are willing to invest in order to grow.”
While he emphasized the ability of the above three companies to compete in a market greatly distorted by Amazon and consumers’ changing habits as online sales continue to grow, Amazon was the largest holding of the fund as of Dec. 31.
Lee said he likes Amazon because “they meet the customer where they are,” and because of the rapid growth of Amazon Web Services (AWS), which accounted for 9.8% of the company’s total sales in 2017, but had operating income exceeding that of the consolidated company. Sales for AWS increased 43% in 2017 to $17.5 billion, while operating profit for the segment increased 39% to $4.33 billion. That exceeded combined operating profit of $4.11 billion for Amazon in 2017.
When asked about Amazon’s recent investments in slower-growing businesses (which Frank Caruso of AllianceBernstein recently cited as a reason he didn’t hold the stock as a portfolio manager), Lee said selling exclusively online “only gets you so far.”
“Good merchants will be able to meet customers where they are if they demand a physical presence, while also keeping them online,” he said. He added that Amazon’s acquisition of Whole Foods was a good demographic fit because the food retailer is present in “affluent areas that tie in well with Amazon’s customer base.”
“Traditional retailers will get better online. As they do, we think Amazon will benefit by having a physical presence. We expect them to extend Amazon Prime to the physical world,” Lee said.
Performance and fund holdings
Here’s how the fund’s two share classes have performed against its benchmark, the Russel 1000 Growth Index as well as the S&P 500 and Morningstar’s Large Growth fund category:
| Total return - 2018 through April 6 | Average annual return - 3 years | Average annual return - 5 years | |
| Logan Capital Large-Cap Growth Fund - Institutional shares | 2.6% | 11.5% | 15.1% |
| Logan Capital Large-Cap Growth Fund - Investor shares | 2.5% | 11.3% | 14.8% |
| Russell 1000 Growth Index | -0.1% | 12.1% | 15.5% |
| S&P 500 Index | -2.1% | 10.0% | 13.2% |
| Morningstar Large Growth Category | 0.5% | 11.5% | 15.1% |
| Sources: Morningstar, FactSet | |||
Total returns are after expenses, which on an annual basis total 1.24% of assets for the Institutional shares and 1.49% for the Investor shares.
Here are the top 15 holdings (of 43) of the Logan Capital Large-Cap Growth Fund as of Dec. 31:
| Company | Ticker | Share of fund | Total return - 2018 through April 6 | Total return - 2017 | Total return - 3 years | Total return - 5 years |
| Amazon.com Inc. | 5.2% | 20% | 56% | 273% | 450% | |
| Apple Inc. | 5.2% | 0% | 48% | 40% | 207% | |
| Netflix Inc. | 5.1% | 50% | 55% | 379% | 1128% | |
| Broadcom Inc. | 4.5% | -10% | 48% | 91% | 626% | |
| Mastercard Inc. Class A | 4.0% | 12% | 48% | 99% | 230% | |
| Amphenol Corp. Class A | 3.9% | -6% | 32% | 44% | 140% | |
| Global Payments Inc. | 3.9% | 9% | 44% | 135% | 392% | |
| Align Technology Inc. | 3.8% | 10% | 131% | 362% | 690% | |
| Facebook Inc. Class A | 3.5% | -11% | 53% | 91% | 474% | |
| Monster Beverage Corp. | 3.2% | -12% | 43% | 22% | 238% | |
| Home Depot Inc. | 2.8% | -7% | 45% | 62% | 177% | |
| Estée Lauder Cos. Class A | 2.7% | 18% | 69% | 84% | 153% | |
| Constellation Brands Inc. Class A | 2.6% | 0% | 51% | 96% | 390% | |
| Electronic Arts Inc. | 2.5% | 13% | 33% | 107% | 582% | |
| Mettler-Toledo International Inc. | 2.4% | -10% | 48% | 70% | 171% | |
| Sources: Logan Capital Management, FactSet | ||||||