Amazon-Sized Craziness

By Dasan

The fourth element of the monthly Dasan Stock Digest is the Dasan Focus Report. In this report, I cover whatever I find interesting at the time. In this particular issue, I will cover what has to be the story of the week for any stock investor - the trading in Amazon (AMZN) shares in 2009, culminating in Friday’s 25% move.

Many value investors worship at the feet of Ben Graham, who literally wrote the book on Value Investing. He came of age during the Great Crash in the 1930s and was the first person to put in writing a method of stock market investing that relied on buying cheap stocks. In his seminal work, he made a strong point that stock investors should always invest with a Margin of Safety by buying a stock that is trading for below asset value. This is where most Value Investors stop. They keep repeating “Margin of Safety” as if it were a mantra.

I will make a controversial statement (I like to do this often) and say that Margin of Safety is as real as the Tooth Fairy. There is no such thing as a Margin of Safety, because even tangible assets (such as printing presses or semiconductor fabs) can become almost worthless if they don’t produce earnings.

The most important, brilliant, massively valuable insight that Ben Graham had to offer was his metaphor of “Mr. Market.” He said the best way to think about the market was it was like a business partner with emotional problems. You own half of, say, an online bookstore. Your partner owns the other half. When his hemorrhoids are flaring up, he goes a little nuts and offers to sell you his half of the business for only $50. You have the chance to either buy him out or do nothing. Then, if the moon crosses Jupiter a certain way, he offers to buy you out of your half for $118, even though yesterday he would have paid only $88 for the same business. Warren Buffett, the richest man in the world, often says understanding this fact about the stock market is the most important key to investing.

Ladies and Gentlemen, I will take the metaphor even further. Mr. Market does not just have emotional problems, but he has Tourette’s Syndrome, Clinical Depression, and a bad Crystal Meth habit all at once! If you don’t believe me, take a look at what has happened to the trading of Amazon stock over the last year.

On Friday, after reporting good earnings, the stock jumped 26% in one day. This means about $10 billion of market value was created out of thin air in one day! Take that, efficient market theorists!

Let me start by taking a look back a few months.

In the beginning of 2009, the chorus of naysayers on Wall Street was saying how terrible Amazon was. It was too expensive, the P/E was too high, the consumer was dead, and so on. What you really had was the set-up of a lifetime to buy quality stocks.

How did Wall Street analysts handle things? Look at the chart below. On Jan 4th, 2009, when AMZN was only trading at $54.46 per share, the average of all analysts ratings was 3.51, implying about 2/3s had “hold” ratings and only 1/3 were “buy” ratings. Look at the craziness at the far right of the chart - once the stock jumped to $118, the average of all ratings was 4.05, a record high on the same day the stock hit all-time highs! The chart of analyst ratings is rather flat, since most analysts on wall street just put a “hold” when they mean “sell” or “I don’t have any idea what I’m talking about .” But it’s clear that there is little value from following these analysts, and in fact, it may be smart to do the exact opposite.

click to enlarge

OK, I’ll admit being long stocks in the first quarter of 2009 was too scary for most people. So forget about that. How about waiting for the smoke to clear a bit? How about waiting until Amazon had already gone up from $52 to $79?

Here’s my commentary from my blog on May 25, 2009, when I reviewed my portfolio decisions in Q109:

“My idea was to stick with “Triple A Tech” through this storm. By Triple A Tech I mean AAPL, ADBE, AMZN. Three companies with rock-solid defenses and enormous moats. I was told by many that “shorting AMZN is a no-brainer – the consumer is dead.” My thought was the world’s most efficient e-tailer becomes even more valuable as high costs and collapsing sales put their competition out of business.

Independent thinking wins out again. Notice- contrarian thinking – simply buying the stock that was down the most didn’t work – nor did avoiding AMZN because it had a high multiple.” weblink

Disclosure: Long AAPL, AMZN, ADBE

Comments

[eddybaby:]

AMZN is a great company without question. Should that translate into such a nosebleed PE?

Think RIM a few months ago; all was good and the sky was the limit. The same reality check that hit RIM will hit AMZN too. For further evidence of the dangers of bidding up stocks hoping the multiple will hold, look back at MSFT or WMT both great, but both have flat-lined for years to allow for the PE to compress back to more sensible levels.

If AMZN is still >100 in a year, I'll eat my kindle.

Nov 13 08:47 AM

[Charles McC...:]

Think RIM a few months ago; all was good and the sky was the limit. The same reality check that hit RIM will hit AMZN too. For further evidence of the dangers of bidding up stocks hoping the multiple will hold, look back at MSFT or WMT both great, but both have flat-lined for years to allow for the PE to compress back to more sensible levels.

... or take a look at CRM

Nov 13 09:21 AM

[mollytjm:]

when you invest in technology, the moat better have sharks in it because it's like investing in nothing else. i have APPL because i think it has the best moat. It's not enough to have loads of cash, a good reputation, great products and great marketing, if you can't innovate better and faster than the competition.

The reason Jobs won Fortune's Best CEO of the Decade is because for the past 10 years he has seen the future. Partly it's because he's helped create it, but he also 'gets' where technology is going and has the savvy necessary to hire worthy staff and direct them toward profitable and amazing products.

I read books on my iPhone all the time, as well as playing games (oh, and i also make a phone call now and then). When i compared the Kindle book reader with my experience of reading on the iPhone, i laughed. Even though the iPhone wasn't created as a dedicated bookreader, it's wonderful and has a much nicer user interface. I'm sure Apple will take over that market in the near future.

Amazon is a great company and i shop on it a lot (there's an app for that). I just don't know if they can compete with technology products in the long run. There's no 'safe' investment in anything. But if you love tech, Apple is the 'most likely to succeed' and still be with us in 2020, even if it loses Jobs.

Nov 13 10:04 AM

[Jeff B.:]

It is foolish to think of AMZN as merely a technology play. They are the best retailer in the world. Period. End of story. That is only going to get better. Bezos is a genius. He may not be as "cool" as Steve Jobs, but he knows exactly what he's doing. I still remember the "analysts" (so-called industry experts) in the late 90's who predicted that Amazon would fail. The bears are still growling, then years later. Some people never learn. Mark my words, in a mediocre year for Christmas sales, AMZN will soar, and the Kindle will sell out, again.

Nov 13 10:21 AM

[Roger Knights:]

The speed, robustness, friendliness, and features of Amazon's web site cost a nine-figure sum and are unmatched anywhere. (Although I have a half-dozen gripes about it.) That's a tremendous moat. Walmart's online store is no threat.

Plus, Amazon has credit card info for half the US populace. Plus, Bezos gets the big picture and is willing to sacrifice the company's short-term and parochial interests for the long-term. Plus, the company is pioneering in cloud computing and e-book readers and who-knows-what-else.

(The iPhone is useful for short-term reading. For hours-long reading, it's harder on the eyes and exhausts its battery ten times faster. And it's harder to read in sunlight.)

Nov 13 10:26 AM

[rmenton:]

I goes against my beliefs to argue with someone who "loves" a retailer, or "thinks Bezos is a genius", but here goes. AMZN is another public company. They are growing at a good pace. They don't make anything. Those that do, are never going to commit their capital to making stuff if there is only one retail channel. AMZN is the dominant online retailer, but like all other dominant anythings, they will hit a period where their growth slow. If there is anyone who can site a case in history where this hasn't happened, please do. AMZN is trading at a very high price, one that cannot represent value. Own it at this price if you dare, but in the long term, you will not get your money back.

Nov 13 12:10 PM

[thrader:]

Today I added another shorting batch. Average now 130 :D
This baby is going to crash big time.....just watch the action in the next few sessions.

Only an idiot would say amazon is worth at a PE of 55-75.

Nov 13 04:26 PM

[Shabba:]

I think the stock is more a reflection of cheap money than the actual fundamentals of the company. I'm short the stock, so I am kind of biased. But this just gets absolutely more and more ridiculous as time goes on.

I like the company, it's a great story and they'll do well but the stock is just totally ridiculous. You have to keep things in perspective by remembering that they earned .45 a share last quarter and that was .15 more than the same quarter last year. And on than news the stock has gone up $45.00 a share on the earnings announcement and the ridiculous pump and dump upgrades that followed.

Nov 13 05:36 PM

[ryanclarke:]

When you look at the market cap's of INTC, AMZN, AAPL, IBM, etc. of the twenty to fifty "BIG TECH" companies ... and then the market cap of the smallest five hundred "SMALL TECH" companies ... you would realize since about fifty players have ALL THE MONEY ... and five hundred DONT HAVE ANY MONEY and yet are still publically traded companies ... my God, Cray Computers is still around even though Intel put them out of business years ago ... WHICH IS WHY THERE IS LITTLE INNOVATION LEFT IN THE TECH INDUSTRY ... Mr. Market will shuffle the deck sooner than most people want to believe.

Nov 14 01:32 PM

[Stefan Sida...:]

I think that AMZN will correct when the market corrects. I dont' know when this will happen, but it could hang until sometime next year when the fed has to make the choice between raising rates to control inflation and leaving rates the same to prevent/minimize housing collapse part II. For now, I think this is a dangerous stock to short. Wait till the market starts to crumble. Wait till you start reading about billion dollar mortgage write-downs again. Wait till after December earnings come out. What if they have a blow-out Christmas? How long are shorts willing to wait for a pay-off? It could be a while.

Nov 14 08:33 PM

[thrader:]

"How long are shorts willing to wait for a pay-off? It could be a while."

..don't worry, the massive correction is just around corner. A falling sp despite a massive (fake) rise in the market, lol. I'll take my huge profits no later than a couple of weeks from now.

Hold on tight to your hat as your longs will be shaking shortly.

The bears are coming out and they are hungrier than ever :D

Nov 16 04:24 PM