In trading business parlance they call it “juking your positions.”
What that means is a large holder, say Fidelity or Legg Mason (Bill Miller to you guys), of a certain stock, say Ralph Lauren Polo (RL), AutoZone (AZO), or Amazon (AMZN), pushes a stock higher with a little help from its friends (other long holders) for the one of several reasons. One objective is the end-of-period mark-up. This commonly known exercise pretends to show prices as of the end of a day, month, quarter, or year. Of course, reversing out of these ridiculous, almost fraudulent trades is never easy. In time, prices revert to the original base. However, in good fun, sometimes a short squeeze is effectuated by forcing many weak hands to cover short positions en masse forcing prices higher so the “jukers” have someone to sell to–even if not the entirety of their juked positions. Besides, the false higher print at the end of the period was attained. Sometimes they get an even better reward. They let the moronic media reward them with a conclusion that the stock went up for whatever reason suits the moment, leading foolish, lazy traders/PMs/retail investors into the name. That trap will persist until time immemorial.
Learn Basic Accounting
Let’s start with some basics. If you want to really understand some of my rants, you should really learn some accounting basics. If you want to banter with me, learn the stuff cold and practice reading the notes to financials in the 8Ks, 10Qs, and 10ks.
Amazon’s Report Ignores Shipping
OK. Let’s move on. The obsession with top line revenues is interesting and usually proper. Yet, if a company sells a $50 unit that costs $40 for only $40, they sell a lot of product but make no money. I like to use extreme examples to prove my points so please bear with me when I do. It all makes sense in the end. The other part of top line analysis steps down a level to the gross margin figure.
Sales - Cost of Goods Sold (CGS) = Gross Profit.
That figure over the sales figure is the gross margin percentage, a measure carefully watched by Wall Street geniuses. I mean analysts. As well they should, but accounting rules permit that CGS portion to include or exclude lots of goodies. In the case of Amazon, shouldn’t the CGS include a shipping charge? Of course it should because an online retailer can’t get the stuff to you without shipping. IT MUST BE INCLUDED. All told, that cuts Amazon Gross Profit (aka GP) in half and the GP percent from 16% to a barely palpable 8%. Is it a supermarket?
Bottom line: Amazon cut prices to the bone and sold more than other retailers.
It pays for the shipping. That strategy never works! The company predicted lower net income in the next quarter by 37% year over year! I wonder why… The net income, after tax, of $645 for the year will decrease (!!) next year. That provides a multiple on this company of 40 times. Not for nothing, but in this environment at that market cap of 28 billion, nothing gets a 40 multiple. The company does not pay taxes in cash because of past net operating loss carryforwards. Later, this figure will drain cash. Like everything else here, caveat emptor. This stock goes under $30 with or without a rising market. Bill Miller can pray all he wants and may try his juking game. But in the end, as folks remove funds from him and other funds, the support for fantasy names like this are doomed. Remember Starbucks (SBUX)? Yeah. Me too.
Stock position: None.