Amazon (AMZN) stock, after rising 3% on Friday, now trades at a price over 300 times ttm earnings, or 108 times next calendar year-end (2013) earnings estimates (made by 39 street analysts).
No dividend is paid, and only 2% of a $100 billion float is held short. Recent earnings estimates have had only modest increases, and there have been no reductions. The stock is up 20% in price, year-to-date.
So let's look at who put the stock's price where it is, and then see if we may be of any help as to where it may get to next.
Of 450 million shares, 360 million float. Insiders hold 1/5th of the float, and 848 institutions hold another 2/3rds, leaving only 1/8th under the influence of an individual investor public.
The daily ante to be a player in this version of the game is a share of a $750 million pot. Small-timers could easily get crushed.
In our recent analysis of the price prospects for Apple (AAPL) stock, Is Apple A Buy Here?, we outlined a measure of incremental capital flows, and illustrated how the players behaved in that situation. The same approach works here.
The math is easy. Each day's share volume times the closing price is the total capital traded. But if the price increased over the prior day's price, it is only the price increase percentage of the day's total capital traded that adhered to the perception of value by the market's participants.
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On any day where the price declined, then a similar proportional part of the day's trade was extracted from the perceived value.
This article is about a stock, Amazon.com common, not about a company, its products, or the company's management, or its competitors. It is instead also about investors, speculators, investment markets, and market-makers.
Somehow, Amazon.com stock got left out of the dot-com enthusiasm that multiplied AAPL six-fold from $30 a share to $180 in the three years from mid-2004 to mid-2007. Perhaps $500 million of the AAPL capital inflow came from AMZN investors?
But just when others started to shiver, AMZN stock struck it rich, resulting in an incremental investment capital inflow of $2 billion in two days, followed up by an additional $500 million in the next five weeks. AMZN $45 became AMZN $70.
The base capital traded didn't go to pay out Vegas high-rollers who then blew it in the neighborhood jewelry shops. No, the value perceptions on AMZN stock stuck for two more months, when another influx of investor attentions contributed an additional incremental $1 1/4 billion. That took the stock from $70 to $85 in late July of '07.
So, what's going on here? Are the markets just going bonkers? Lots of folks in the late summer of 2007 are very nervous. Many highly leveraged "hedge" funds are starting to lose money big-time. Smart, sensitive investors are getting liquid, including capital we were running.
But not by cashing out of AMZN.
In October of 2007, an incremental one-day injection of $450 million pushed the stock up from $90 to over $100. But that disappeared the next day, and a firm, robust rise began that continued through what has recently become called the "great recession" of 2008-09. (Real old-guard retirees know the Great Depression was in the '30s.)
AMZN incremental investment capital (from the starting point of this counting) hit $3 3/4 billion at mid-August, 2008, with the stock at $87. Then the capital flow eroded by only $400 million (off but -10%) in the week before Thanksgiving, compared to the stock's decline of over -55% to $35. Once again the bargain buyers' incremental capital found great values, left behind by those fearfully fleeing the scene.
While most market averages suffered through the end of 2008 to early March, 2009, with price declines of -25%, AMZN's stock rose from $50 to $60. Not all the flight capital extracted from the equity market averages' components (or ETFs) in that period went into bonds (or mattresses.) Some visited AMZN: Half a $ billion in late January of 2009 restored the stock to near $60.
Then after the market turned up, in late October another $2 billion injection of institutional enthusiasm pushed the stock up from the low $90's to mid-$120s in two days. That ignited further herd interest which has contributed to a net incremental addition to perceived value totaling over $8 billion to date.
Why should investors have behaved as they did? Many well-versed fundamental analysts may have good answers, and investors should seek them out as to the why.
But as to the "when" to be attracted to AMZN stock, we think, once again, the market pros can provide useful guidance. They, dozens of times daily, talk with portfolio managers who are constantly adjusting the contents of equity portfolios worth 9 to 12 or more figures,
It is, after all, big money that moves markets. When the movers need help with stocks of interest, either getting more of, or getting rid of, they call on the market-makers. Those "investment banking" firms provide the risk capital that makes markets liquid enough to fill the big orders of the fund clients.
And the risk-engineers on their staffs know how to hedge away the potential risks at minimal cost, doing it day after day. We know how to interpret the unavoidable evidences of their skills, deducing the ranges of price that they fear might hurt them.
Here is what those "danger zones" for the market-makers have looked like, day after day, for the past 6 months. This history of their unintentional forecasts becomes useful to the less-well-informed investing public.
Two things are important here, the trend of the forecasts, and the daily balances between the upside price change prospect (from each current-day price dot to the top of its range), and the drawdown exposure to the bottom of the range.
We measure the upside-to-downside balances using a Range Index metric where the current price is the percentile up from a range bottom = 0 and a top = 100. That facilitates the examination of how daily prices in subsequent months behave following various levels of up-to-down imbalance.
The nature of a very logical stock like AAPL was illustrated in the article previously referred to. If that commentary is not yet reviewed, it may provide a useful contrast when considering the similar analysis for AMZN, about to be presented.
Here is the array of Range Indexes experienced by AMZN daily over several recent years. As usual, the more extreme imbalances are less frequent, from a median value of 36 (roughly twice as much upside as downside) to a low of 15 and a high of 75.
This is not some formula-derived distribution, but is an actual count of occurrences. Far more distant Range Indexes above 50 (the point of equal upside to downside) skew the distribution to the right. Range Indexes below the median of 36 are concentrated in a narrower span to the left, down only to a Range Index of 15.
It is against this backdrop we will look at the nature and size of subsequent price changes. First, to consider direction of movement. We look to see what proportion of the 63 market days in the next 3 months have a closing price higher or lower than the day of the forecast.
As suggested by the picture of incremental investment capital flows, AMZN's dominant price direction largely has been upward. This picture's right-hand scale indicates that it is rare that as much as one-third of a 3-month span would see lower prices.
What is unusual here is that even with high Range Indexes, a large, and increasing, part of the time sees higher prices. The picture for AAPL was characteristic of a "value" stock. As prices rose in the forecast range, the investment value proposition declined - lower returns, at less frequency.
The opposite character, of poor returns following prices dropping in the forecast range, is typical of what are pathetically called "growth" stocks. They often are accompanied by high Range Indexes when both price and forecast ranges are in an uptrend. These are really trend-follower or "momentum" stocks that often lead to "buy high and sell low" results. Their bell rarely rings clearly, loudly, or early enough to avoid serious drawdowns.
AMZN is a strange hybrid in character, having both natures. The least opportunity seems to be presented where the frequency is the greatest. Looking at the size of price changes involved tends to reinforce the quandary.
Combining the Odds and the Payoffs histories, and netting the odds-weighted losses against the gains, produces the expected result. Basically, it suggests, "wait until either extreme Range Index appears before acting."
The present Range Index is 25, offering a history of gains three times as large as drawdown exposures, with gains available three times as often as prices are below cost.
When we put this background together with our often advocated set of time-efficient investment management disciplines, it reveals a 5-year history of 134 prior Range Indexes at least as attractive as the present. That is about 10% of the time.
Investments in all 134, on the day after each forecast, offered a cumulative average return of 7.3% in typical holding periods of 29 market days (6 weeks) for an average annual rate of gain of 84%. Profits were earned in 82% of the ventures, and the costs of the others are included in the net gains just indicated. Maximum drawdowns in each instance averaged -6%.
That's not exactly ugly, so if the reactions of big-money investors in the near future are like what they have been in a fairly large sample over a rather diverse market time period, an investment in AMZN may well reach an 11% higher sell target before the next 3 months are up. But no guarantees.
By the way, if AMZN behaves in the future the way it has in this past, and so do all the other 2,000+ stocks we cover, it would outperform 95% of the rest.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.