How to Play the Situation for Maximum Profit Potential
So, now what?
I think there’s a great trade here. Perhaps even two or three.
Amazon is getting into the transportation business and nothing the president does or says will stop that.
The company has already purchased thousands of its own truck trailers and is getting into the ocean freight business in order to move goods around the world, but particularly between the United States and China.
I’m most interested in aircraft, though.
Amazon reportedly has plans for a number of air cargo hubs like the $1.5 billion facility that will be capable of handling 200 cargo flights per day it’s building in Kentucky. Ultimately, there are enough parking slots to hold 40 Amazon Prime Air planes (likely Boeing 767s, in case you’re wondering) – 16 of which were already in service as of January 2017 just over a year ago when the initial plans were announced.
Amazon wouldn’t be doing this if a) it didn’t need additional capacity to pick up where FedEx Corp. (NYSE: FDX) and United Parcel Service Inc. (NYSE: UPS) leave off, and; b) if there were not additional aircraft orders pending.
The best and most direct way to play this is to put your money alongside Amazon’s.
Let me explain.
Big companies very rarely buy aircraft outright for the cargo business but, prefer instead, to lease them. That way they can use their capital more efficiently in ways that don’t negatively impact their balance sheet.
It’s a classic “pick and shovel” strategy similar to that which we’ve used successfully over the years to capitalize on recommendations with oil pipelines, like Andeavor (NYSE: ANDV), while avoiding the volatility of oil prices themselves and, more recently, with chip makers, like NVIDIA Corp. (Nasdaq: NVDA) to play AI and blockchain technology, while avoiding the volatility associated with robotics and cryptocurrencies.
Amazon struck two strategic partnership deals with Atlas Air Worldwide Holdings Inc. (Nasdaq: AAWW) and Air Transport Services Group Inc. (Nasdaq: ATSG). In both cases, the company received warrants as part of the transaction.
Amazon, according to public information, could buy 30% of Atlas Air Worldwide by 2022 at a price of $37.50 and 20% of Air Transport Services Group by 2021 at $9.73 per share. Right now, the former is trading at $60.90, while the latter is trading at $23.47.
This is particularly important because Amazon has a well-documented track record of buying companies it perceives as leaders in their space… after initially bringing them inside the proverbial wall with deals like the two I’ve just touched on.
Evi Technologies, for example, built “Evi” in 2012 – and in 2013 that same intellectual assistant software would get purchased for $26 million. Today, you know Evi as “Alexa.”
Amazon purchased TextPayMe in 2007 and, after an abortive effort known as WebPay failed in 2014, Amazon Payments is a viable competitor to PayPal.
No doubt you see the pattern here – Amazon doesn’t invest in anything it can’t use.
I believe Amazon’s need for cargo aircraft will grow faster than many people think. Forty aircraft are just the tip of the iceberg, which means the leasing companies providing ’em will make out like proverbial bandits as Amazon expands.
This type of growth is, unfortunately, still way, way under the radar for most investors, so they’re going to miss out. And, once again, that gives savvy investors a great entry point.
*This has been a guest post by Money Morning*