Five online retail stocks to diversify your portfolio with

Retail e-commerce sales worldwide amounted to $3.53trn in 2019, and are poised to reach $7trn by 2024. To put this in perspective, Germany’s GDP in 2019 was €3.5trn ($4.2trn), and it is no secret that since Covid-19 online sales have gone up while the GDP of almost every country has gone down. Will e-commerce continue to gain momentum? The odds are that it will, especially in terms of online sales growth as a percentage of total worldwide sales. 

Optimising your portfolio

Modern portfolio theory comprises a mathematical framework for assembling a portfolio of assets such that the expected return is maximised for a given level of risk. It was formulated by Harry Markowitz, who was revered in academia and disliked by savvy stockpickers such as Warren Buffett. 

That is because, as Markowitz said, “diversification is the only free lunch in investing”, for it promises the best results for any given level of risk tolerance – and hard-nosed professional investors don’t believe in free lunches and loopholes. 

But unless you are Warren Buffett, or even a full-time professional stockpicker able to analyse thoroughly each company you buy, the Markowitz model – diversification, to give it its simple name –is your best ally. The key question to ask yourself is which stocks diversify your business risk as much as possible? 

There may be several possible answers to that question, but should you be convinced (as I am) that business risk translates as cash-flow risk and is correlated to economic cycles, then there is no better choice than e-commerce stocks.

Look beyond Amazon

We own Pinduoduo (Nasdaq: PDD), the second-largest online marketplace in China and one of the world’s largest internet companies with a market capitalisation of $117bn. The company is growing revenue at an annual pace of more than 50%, which is helping it to expand its online presence.

On the other side of the world you have companies such as Mercado Libre (Nasdaq: MELI), which, like Pinduoduo in China, dominates e-commerce in Latin America. Towards the end of last year the share price bounced by about 12%, propelled by new buy ratings issued by analysts covering the stock. 

Moving back to developed markets, we like Pinterest (NYSE: PINS), which is the only social network that may one day earn more from e-commerce than advertising. We bought Pinterest in the second quarter of 2020 in the belief that it will become the biggest shop window in the world. The stock had gained about 200% as of the end of last year and its profitability is improving every quarter.

The developing DIY economy

Finally, we believe that after Covid-19 we will see rapid growth in the DIY (do-it-yourself) economy, which bodes well for companies such as Etsy (Nasdaq: ETSY) and Shopify (NYSE: SHOP). Covid-19 has increased the unemployment rate across the globe and many people will struggle to find a new job in time to pay their bills. 

They will have to become entrepreneurs or sole traders to survive and so will turn to platforms that allow users to trade their own goods or set up a business instantly. Both Etsy and Shopify are experiencing strong growth in sales and profitability.