By Robert Weinstein
I recently wrote an article comparing Netflix (NFLX) and Apple (AAPL), and I couldn't help but wonder if I really was picking the right comparison with Apple. I have also compared Apple with Amazon (AMZN) because I believe Amazon is the best shorting opportunity with a time frame of 12-24 months.
Most investors rightly are not focused beyond 24 months without at least rebalancing every six months as a result of new information and changing valuations.
Also, like the weather, the further we try to look forward, the greater challenge it becomes to remain accurate in our predictions. Even when a stock's price trends in the expected direction, the catalysts may look very different than when we begin.
As a market timer, I am forever seeking extremes in price that indicate a pivot point resulting from a market sentiment shift. If you want to know the relative value of a stock compared to peers and the market you use fundamental analysis and if you want to time your entry, you use technical analysis.
Technical analysis isn't viewed with a great deal of esteem on Seeking Alpha, and it's understandable. Technical analysis is like sex, most people think they are better at it than they really are. I will let the timing of my article indicate that now is the time I believe favors entry.
I like all three companies, so if you're reading to find out how I bash the companies you're going to be disappointed. Investing isn't about the company, it is about buying a stock for less than you sell it for.
First up to bat is Research In Motion (RIMM). I have stayed mostly bullish in the past six months. Take a look at this Nokia (NOK) and RIM article that I believe is still relevant. Recently, the enthusiasm for RIM's BlackBerry 10 has moved shares sharply higher.
Like most stock moves based on emotion, the market has overshot the mark, and the upside is very limited relative to the risk of loss. Avoiding losses are more important in investing than making profits.
Most investors are focused on how much money they can make, and give very little thought to how much they can lose, or to the chances of losing. It's fine to have a large risk of loss if you keep your position size very small, and your payoff is huge. Otherwise, you need to keep risk at the forefront of your investment decisions.
Can BB10 move RIM into the black? Not likely, and by definition, it means RIM will need a follow up product to turn a new leaf. Not just any product, but another OMG product before the next holiday season. As long as Google (GOOG) and Microsoft (MSFT) are subsidizing software for competitors, RIM will have a tough time keeping up, much less leap frogging into a lead position they can maintain.
I put the odds of RIM presenting a new follow up OMG phone before this holiday season about the same as my house in Wisconsin not receiving snow next winter. Simply put, the release of RIM is a buy the rumor, sell the news event.
Expect RIM shares to trend near $10-12 a share until either the Waterloo, Ontario, company releases another winning product, or they are bought out.
Netflix is the second stock in my spotlight. I like Netflix more than RIM because I actually use Netflix. If emotional greed pushed RIM higher, we can see what happens when a company is hit with emotional fear.
Typically fear means a falling price, and a great example of fear driving a market is Apple. Sometimes fear drives a stock price higher, and we call this a short squeeze.
If you want to buy a stock that has oversized short interest like Netflix, you want to gain your shares before, not after the squeeze. Before the gap higher, Netflix was reported as having a short interest of almost 1 out of every 4 shares.
Once the shorts capitulate into covering their positions, a short squeeze stock often falls right back where it started if the fundamentals haven't shifted enough to justify the greater valuation.
Netflix does an awfully poor job of monetizing customers. The only area that Netflix demonstrates decent monetization is with DVD rentals through the mail. This is a quickly shrinking business that will lose critical mass in a matter of time.
Unless and until Netflix offers new ways for customers to spend money, the all you can eat model will not be enough to keep Netflix in front of competitors that include Amazon and Apple.
As long as Netflix is willing to leave advertising, pay-per-view, social interaction, and hardware sales for others, Netflix may have greater potential, but for how long? You may not want to short Netflix, but if you own shares, consider taking some profit and/or writing covered calls to lower your risk.
Last but not least on my list is my number one short sale suggestion. Amazon is trading at "stupid" expensive. As I previously mentioned, I don't dislike Amazon, and my wife and I have an Amazon Prime account.
We use the Prime account often, and for this very reason Amazon isn't a good buy at a PE of over 3000. For reference sake, I generally start to avoid companies with a PE over 20. Another large tech company that competes with Amazon is Apple with a PE under 10.
I should be able to stop right there and feel comfortable I made my case, but there is much more to this story. Much of Amazon's business is moving towards commoditization which generally means lower margins, not higher.
You will have a hard time finding anyone who suggests Amazon's margins don't need to increase to justify current valuation. Digital books now outsell physical books, and I believe it's reasonable to assume this trend will continue. Digital books by definition means the competitive advantages Amazon enjoys with efficient distribution and inventory will vaporize.
Publishers are increasingly able to sell their entire relevant inventory to anyone with a website, or simply sell directly and avoid Amazon all together.
Amazon's margins are currently under pressure as a result of its build-out of warehouses all over the country to lower transit times for products. That sounds all well and good until you add in the fact that it's Amazon's low cost that drives sales, not transit times.
Amazon will either have to raise prices, or suffer a hit to margins, relative to the current prices. One can make the argument that paying ground rates instead of two day shipping rates for more products will help lower shipping costs, but that ignores the fact that Amazon has unsustainably low margins to begin with.
Amazon is my biggest short pick for 2013, and I believe the way to capitalize on Amazon is to sell either call options with a strike price of $275 - $300, or the more conservative approach of selling bear credit spreads.