Bringing Amazon Up To My Growth Portfolio In Place Of Dominion Resources

Aug.25.14 | About: Dominion Resources, (D)

Summary

While the overall market is flying high, I want a high flyer such as Amazon in my portfolio.

Dominion is a slow moving dividend paying vehicle that I debated moving to my dividend portfolio.

Amazon is actually inexpensive based on short-term earnings growth expectations.

I recently closed my position in Dominion Resources, Inc. (NYSE:D) from my growth portfolio because I felt that I had a pretty good profit at the time. I moved shares of Amazon.com, Inc. (NASDAQ:AMZN) from my relegation league to the growth portfolio after selling Dominion. Amazon is an online retailer. The company sells its products from a website. It also provides services such as advertising services and co-branded credit card agreements. On July 24, 2014, the company reported second quarter earnings of -$0.27 per share, which missed analysts' estimates by $0.12. In the past year, the company's stock is up 16.42% and is losing to the S&P 500 (NYSEARCA:SPY), which has gained 20.07% in the same time frame. I initiated my position in Amazon on December 4, 2013 and am down 8.25% on my position.

I sold my shares in Dominion because I wanted to lock in some profits in the portfolio and move into a faster moving name. Dominion is a producer and transporter of energy. It manages its daily operations through three operating segments namely Dominion Virginia Power of DVP, Dominion Energy and Dominion Generation. On July 30, 2014, the company reported second quarter earnings of $0.62 per share, which were in line with the analysts' estimates. In the past year the stock is up 21.01% excluding dividends (up 24.58% including dividends) and is beating the S&P 500, which has gained 20.07% in the same time frame. Let's now take a look at both stocks on a fundamental and financial basis.

Fundamentals

Some investors like to look at the trailing twelve month P/E ratio because it tells them how the stock is valued with respect to earnings which were actually earned. I mainly like to look at the forward year P/E ratio to get an idea if earnings for the coming year are about to increase or decrease. I don't like paying more for a company's future earnings than what I was paying for the previous year because it indicates that the earnings for the coming year are going to be less than the previous year. A reduced future year earnings indicates either a reduction in revenues or major expenses are being incurred.

I also like to look at the 1-year PEG ratio. This metric is the trailing twelve month P/E ratio divided by the anticipated growth rate for a specific amount of time. This ratio is used to determine how much an individual is paying with respect to the growth prospects of the company. Traditionally the PEG ratio used by analysts is the five year estimated growth rate, however I like to use the one year growth rate. This is because as a capital projects manager that performs strategy planning for the research and development division of a large-cap biotech company I noticed that 100% of people cannot forecast their needs beyond one year. Even within that one year things can change dramatically. I put much more faith in a one year forecast as opposed to a five year forecast. The PEG ratio some say provides a better picture of the value of a company when compared to the P/E ratio alone.

An additional value I like to look at is the earnings per share growth for the coming year. This metric is really simple, it is essentially taking the difference of next year's projected earnings and comparing it against the current year's earnings. The higher the value the better prospects the company has. I generally like to see earnings growth rates of greater than 11%. Again, in this situation I like to take a look at the one year earnings growth projection opposed to the five year projection based on what I discussed in the PEG section above.

Let's take a look at how Dominion and Amazon stack up against each other on a fundamental basis in the table below.

Stock

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

D

69.51

25.94

18.62

3.73

56

4.01

6.47

AMZN

331.59

872.61

171.01

1.94

29

0.58

1485.7

Click to enlarge

Because both stocks are considered growth stocks due to their extremely high earnings growth expectations (Dominion is extremely high with respect to other utilities) one would anticipate their earnings valuations to be expensive. As we can see from the table above, Dominion is fairly valued (I consider a P/E value between 15 and 30 to be fair) and Amazon is expensive on trailing earnings (I consider a P/E value above 30 to be expensive). Additionally, on future earnings Dominion remains fairly valued while Amazon remains expensive. But because both stocks have different growth profiles it's important to measure the PEG ratio. By looking at the PEG ratio I believe that Dominion is expensive (I believe a PEG value above 2 is expensive) while Amazon is cheap (a PEG value below 1 is inexpensive for me). Hence on a fundamental basis I believe Amazon to be the better stock because I value the PEG ratio the most for growth stocks.

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. In my growth portfolio however I will forego the dividend aspect of the financials if a company doesn't pay one. Return on assets is the metric which shows how profitable a company is relative to its total assets, telling us how efficient a management team is at using its assets to generate earnings. It is best to compare ROA values of companies within the same industry as it is industry dependent, but for the purposes of this tournament I will not be utilizing that rule of thumb. The assets of a company are comprised of both debt and equity. The higher the ROA value, the better, because the company is earning more money on less investment.

Return on equity is an important financial metric for purposes of comparing the profitability, which is generated with the money shareholders have invested in the company to that of other companies in the same industry. It is best to compare ROE values of companies within the same industry as it is industry dependent, but for the purposes of this tournament I will not be utilizing that rule of thumb. Equity is determined as the net income for the full fiscal year before dividends paid to common stock holders but after dividends to preferred stock, but does not include preferred shares. The higher the ROE value, the better.

ROI is an important financial metric because it evaluates the efficiency of an investment that a company makes and if an investment doesn't have a positive ROI, then the investment should not be made. It is calculated by dividing the difference of cost of investment from gain from investment by cost of investment. It is best to compare ROI values of companies within the same industry as it is industry dependent, but for the purposes of this tournament, I will not be utilizing that rule of thumb. The higher the ROI value the better.

Let's take a look at how Amazon and Dominion stack up against each other on a financial basis in the table below. As we can see from the table, Dominion is definitely the better financial manager of the two as it beats Amazon on all financial metrics I look for in a company and it even pays a dividend.

Stock

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

D

3.45

90

3.1

13.3

7.0

AMZN

N/A

N/A

0.5

1.8

3.9

Click to enlarge

Wrap Up

I sold Dominion for a 6.15% gain or 7.74% on an annualized basis. Again, I only sold Dominion because it made me a great gain and I wanted to lock up some profits. Dominion is a very excellent stock and I was debating whether or not to put it into my dividend portfolio in the utility sector there.

Dominion's future growth potential consists of being able to distribute natural gas globally through its natural gas terminals. Amazon's future growth potential consists of being able to distribute its products globally and innovate new services for the consumer to subscribe to. Amazon is definitely a high flier and this is a name I want to be in during a time when the market is flying high.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: The author is long AMZN, SPY.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.