Is Amazon Worth The Risk?

by: Insider Monkey (NASDAQ:AMZN) is the go-to site for online shopping, especially now that the company is rapidly developing an ecosystem reminiscent of Apple (NASDAQ:AAPL). The company uses its Kindle line to tie together its Prime Membership, video streaming, and digital media, while encouraging shopping through free two day shipping for members--but it isn’t without its competitors. Companies like (NASDAQ:OSTK), Sears Holding Corporation (NASDAQ:SHLD) and Wal-Mart Stores (NYSE:WMT) are offering memberships and marketplace type shopping, so it is possible to buy items from other retailers through their site with heavily discounted shipping. As these competitors gain footing, and each of these companies face issues relating to the advent of state sales tax being applied to online purchases and a shrinking economy, the only question is whether any of these companies are a good investment.

Hedge fund managers are of different camps. Ken Fisher’s Fisher Asset Management is bullish on AMZN, while the notorious Warren Buffett’s Berkshire Hathaway has more than $2 billion in WMT. Even Fisher has a $300 million position in the company. Eddie Lampert’s ESL Investments became synonymous with SHLD. Lampert has $3.4 billion in SHLD. Francis Chou’s Chou Associates Management is bullish on OSTK. So, which one is the better investment?

To answer this question, we are going to look at these companies in closer detail.


First, we will look at the P/E ratio. This metric divides a company’s share price by its earnings per share – the lower the number, the better. P/E ratio indicates how many times its earnings a company is trading at. If the P/E ratio is high, the stock could be overpriced, so the lower the better. Of the companies we looked at, WMT had the lowest forward P/E at 11.73. OSTK was next at 21.42, followed by AMZN at 99.30. A forward P/E ratio was not available for SHLD.


We used beta as a measure of risk. A beta of 1.0 means that the stock moves with the market. The higher a stock’s beta, generally, the more volatile the stock-- and as a result, the more risky. A lower beta tends to indicate that the stock moves more independently from the market. WMT had the lowest beta of the companies we looked at, coming in at 0.35, followed by AMZN at 0.97, OSTK at 1.74 and SHLD at 1.77.


Next, let’s look at the earnings growth consistency and expectations. Expected growth estimates can be wrong. In fact, they are frequently overstated, but they can be useful when comparing companies or comparing a company’s performance relative to its industry. AMZN’s earnings grew at 30% over the last five years, compared to the industry’s 15.5% earnings growth. Its earnings are forecasted to grow by 25.4% over the next five years, compared to 23.4% for the industry. OSTK is expected to just underperform the industry, at 20%. WMT is forecasted to grow just 11%. Earnings growth estimates were not available for SHLD.


Stocks that are favored by hedge funds tend to outperform the market by a few percentage points on the average. Each of the funds we looked at has a fair amount of hedge fund ownership. AMZN is the most popular. Of the 300+ hedge funds we track, 51 had positions in the company at the end of the second quarter. WMT is next at 37, followed by SHLD at 17 and OSTK at 4.


Overall, we like WMT best. AMZN could be positioned to explode, especially if its low priced Kindle Fire, which is slated to be released in mid-November, is as successful at gaining market share from Apple's iPad as some think it will be. Right now it is trading too high relative to its earnings to be worth the risk. WMT, on the other hand, is priced low and it has a low beta, meaning its performance is not tied to the market’s performance. Other companies with a similar profile include the Nippon Telegraph & Telephone Corp (NYSE:NTT), with a P/E ratio of 10.12 and a 0.35 beta, or NTT DOCOMO (NYSE:DCM), with a 10.98 P/E ratio and a 0.20 beta.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.