Everyone in the world is talking about the strong prospects of ecommerce and how growth is extremely hard to come by these days without an online presence. That excitement hasn’t transferred to shares however as the sector has grown just 6%+ year to date compared to the S&P 500’s 10%+.

So it’s reasonable to wonder what went wrong, why share prices didn’t reflect the continually surging demand.

Believe it or not, the main culprit is very strong demand. In fact, demand is so strong, that it makes no sense for companies to record big profits, but rather to plough more resources into the business to feed future growth. As a result, the EPS is not exciting and the shares start looking overvalued. In the case of traditional retailers, most are in varying stages of building an omni channel experience, which basically means investing in both physical and online stores. Since brick-and-mortar is steadily losing demand to ecommerce players, they are seeing both weaker sales and increasing costs, and so, lower profits.

At the same time, the strong growth prospects continue to attract a larger number of players, leading to increased competition. This is more of a concern for online retailers because of their inability to differentiate. If most companies offer the same brands at more or less the same price with no location or other advantage, there is no compelling reason to shop with one store and not another. So players are driven to offer discounts and promotions while also increasing their product range and improving their logistics capabilities.

This brings us to the very important phenomenon called Amazon (AMZN Quick QuoteAMZN - Free Report) . I refer to Amazon as a phenomenon here because it is so huge that its actions alone can affect the entire market. Moreover, it does everything required to compete effectively and does it all better than everybody else out there. So there are rock bottom prices, a huge and constantly growing product range, superior logistics (so free and speedy delivery) and also a loyalty program in its Prime subscriptions (that people actually pay for). So while in theory there’s room for others to grow, in practice, life is difficult for traditional retailers in particular and also Amazon’s online peers. Niche players can however do well because of their specialized services they offer.

The retail business is by its nature, very low margin unless you’re selling something rare or precious. But companies still need to do a fair amount of advertising, especially on online channels like click-based advertising, content marketing, or social media. Not all players are able to spend as much as they may need, especially since the growing number of players increase competition for advertising space, driving up the cost per click or the price of an advertisement.

Another challenge is technological expertise. For an online player, it’s very important to see that the customer enjoys the experience of visiting the online store (similar to how they might enjoy visiting a physical store). But in the online world, this can only be achieved with superior navigation, well-displayed and correct product information, pictures that truly reflect the product, a smooth checkout process and increasingly, artificial intelligence to take the customer where they are most likely to buy. All this requires significant investment in technology that online players manage to varying degrees. But the most successful players are those that do this well.

How To Choose Your Stocks

Amazon is a great company and it is well ahead of others in terms of turnover and competitiveness. But one thing it has always done is spend heavily on expansion, while providing limited details on when the investment phase will end. It’s expected that the company will continue to grow, but it’s not clear what the returns will be for investors. So at best, we can say it’s a long-term hold.

For a good return on investment within a relatively shorter period of time, you could look toward other sectors. For instance, for a winning energy stock for 2017, check out the Zacks Top 10 Stocks for 2017, a list that is hand-picked from 4,400 stocks covered by the Zacks Rank. Be one of the first to see the 2017 list>>

Or, take a closer look at the sector as it is relatively well placed (in the top 31% of the 265 industries we cover). So yes, ecommerce stocks can rebound in 2017. Here’s a list of stocks that are likely to fetch stronger returns in a relatively shorter period of time, so good picks for 2017.

Groupon Inc (GRPN Quick QuoteGRPN - Free Report)

Headquartered in Chicago, Illinois, Groupon is a discount retailer in North America and internationally. Its deals cover health and beauty, retail, services, activities, events, and food and drink. The traditional business model involves selling discount vouchers or Groupons on locally available items that customers can redeem at third party merchants. More recently, it has built a marketplace for these items as well. 

Zacks Rank #2 (Buy)

Last 4-quarter EPS surprise 31.07%

2017 estimates loss estimate is down 29.4% in last 2 months

Expected Growth rate in 2017 40.90% (industry 20.30%)

Ctrip International Ltd.

Ctrip.com International is a leading travel service provider of hotel accommodation, airline tickets and packaged-tours in China. Ctrip aggregates information on hotels and flights and enables customers to make informed and cost-effective hotel and flight bookings. Ctrip targets primarily business and leisure travelers who do not travel in a group. These travelers form a traditionally under-served yet fast-growing segment of the China travel industry. Ctrip has experienced substantial growth and become one of the best-known travel brands in China.

Zacks Rank #2

Last 4-quarter EPS surprise 50.32%

2017 estimates are up 13% in last 2 months

Expected Growth rate in 2017 181.10% (industry 20.30%)

Mercadolibre (MELI Quick QuoteMELI - Free Report)

MercadoLibre is the largest online trading platform in Latin America with operations across Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay and Venezuela with leading numbers of unique visitors and page views in each country. It is also expanding its business in Costa Rica, the Dominican Republic and Panama. The company targets roughly 55 million people by leveraging one of the world's fastest-growing Internet populations.

Zacks Rank #2

Last 4-quarter EPS surprise 23.58%

2017 estimates are up 4% in last 2 months

Expected Growth rate in 2017 42.70% (industry 20.30%)

Stamps.com

Stamps.com provides easy, convenient and cost-effective Internet -based services for mailing or shipping letters, packages or parcels anywhere in the United States and at anytime. Its core mailing and shipping services are designed to allow individual consumers or employees of small businesses or larger enterprises to select a carrier, print U.S. postage or shipping labels from multiple carriers, schedule a pick-up, track a package and apply enterprise-wide business rules to manage and account for mailing and shipping costs.

Zacks Rank #1 (Strong Buy)

Last 4-quarter EPS surprise 66.72%

2017 estimates are up 16.4% in last 2 months

boohoo.com plc (BHOOY Quick QuoteBHOOY - Free Report)

Headquartered in Manchester, the UK, boohoo.com designs, sources, markets and sells clothing, shoes and accessories through the www.boohoo.com Website. It operates primarily in the UK, Europe and internationally. The brand name is better known as boohooMan. Key investment criteria are:

Zacks Rank #2

EPS estimates climbing for both fiscal years 2017 and 2018

Zacks' Top 10 Stocks for 2017

In addition to the stocks discussed above, would you like to know about our 10 finest tickers for the entirety of 2017?

Who wouldn't? These 10 are painstakingly hand-picked from 4,400 companies covered by the Zacks Rank. They are our primary picks to buy and hold. Be among the very first to see them >>