A Broad Range of Results for Internet Retailers as Quarantine Results are Measured

The COVID-19 virus and the quarantine orders that occurred have had a tremendous impact on the internet retail sector. The sector includes companies that sell products and services through the Internet. With more and more consumers using online retailers, the companies have seen a big increase in the use of their services.

Some of the companies in the group are focused on selling business-to-business products and services. Others sell business-to-consumer products and services. Internet retailers offer a wide variety of products like books, apparel, and electronics.  Some companies even specialize in only one or two categories.

One potentially critical factor for players to thrive in this space is the quality and speed of product delivery. This requires an investment in efficient distribution networks. Things like logistics are important factors in the success in the extremely competitive industry.

For a company to stay relevant in the industry it must have effective pricing strategies and upgraded websites. The websites must be easy to navigate and engaging for customers.

In addition to the revenues generated from straight sales, internet retailers can generate revenue from subscription fees and advertising. Amazon.com, Inc., Alibaba Group, and JD.com are some of the global leaders.

What is really interesting is that if we look at how some of the most well-known names in the group have performed over the last few months, it has been the lowest rated stocks that have outperformed.

I looked at the entire group, but I focused on five stocks— Amazon (Nasdaq: AMZN), Alibaba (NYSE: BABA), Overstock.com (Nasdaq: OSTK), Shopify (NYSE: SHOP), and Wayfair (NYSE: W). What I found to be particularly interesting is how the stocks have performed over the past three months and how that correlated to the fundamental and technical analysis ratings for the stocks. As the market has rocketed higher after bottoming in March, there seems to be an inverse relationship to performance and quality.

The following screenshot is for the fundamental ratings of those five stocks. The order the stocks are arranged in is based on the returns from the last three months. It hasn't quite been three months since the March low, but it has been close. Notice the number of red stats you see for the top three—Overstock, Wayfair, and Shopify? Notice the number of red stats you see for the bottom two—Amazon and Alibaba?

The technical analysis screen is even more lopsided with the stocks arranged in the same order. There isn't a single red mark for Amazon and Alibaba and each of the other three stocks have at least two red marks. Wayfair and Shopify both have four negative marks on their technical analysis screens.

In order to be more specific, I looked at the price gains for these five stocks since the lows in the market on March 23. For comparison purposes, I also included the SPDR S&P 500 ETF (NYSE: SPY) and the Amplify Online Retail ETF (Nasdaq: IBUY). The chart shows how Wayfair and Overstock have seen meteoric jumps—gains of 466% and 376%. Shopify has gained 98% and the Amplify Online Retail ETF has gained 86%.

The Spyders have gained 44% and Amazon and Alibaba have underperformed the market with gains of 37% and 25%, respectively.

How can this be explained? The S&P 500 just went through its greatest 50-day rally in history and the internet retail ETF more than doubled the return of the index. Okay, that isn't a stretch since these companies should have benefitted from the increase in online shopping.

So how do you explain the stocks with the better fundamental ratings and technical ratings being outpaced by the stocks with lower ratings?

The rally off the March lows has been a full blown risk-on rally. Investors were looking to buy anything and everything that had sold off sharply and that included the likes of Wayfair and Overstock. Shopify held up rather well, as did Amazon and Alibaba.

Now that most of the indices have returned to the levels they were at when the year started and with many ETFs experiencing tremendous rallies over the last few months, I expect a return to quality. We have already seen a shift from growth to value and that has allowed poor performing sectors to catch up to the better performers for the first quarter. Now I expect investors to take profits on some of the high-flying names and seek out the higher quality names once again.