Jason Tillberg's  Instablog

In May, I wrote an article claiming that AMZN was overvalued.  It was at that time, 79.79 per share.  In the short term, I could not have been more wrong.  

We know that share prices of companies are like voting machines in the short term and weighing machines in the long run.  The enthusiasm about Amazon today is quite positive and voters are certainly signaling they want to own Amazon, at any price. 

Today, AMZN closed at 124.64 per share.  

I'm going to upgrade AMZN from my last report in May.  I had lower expectations of revenue growth.  The recent quarter, they showed quite impressive revenue growth of 28% over last years revenue in the 3rd Quarter.  Very impressive to say the least.  I hate to think the millions now unemployed who are home, collecting unemployment checks, are simply buying more stuff and not saving in the event they can't get a job when their unemployment runs out.   

In my last report, I put AMZN at having a "fair"present value of 21.88 per share.  I have recalculated a fair present value at 56.50 per share.  I still remain bearish on the current price however and would recommend a short for non risk adverse investors.   

First and foremost, the tech boom is over.  Saturation of the market of households with internet access is near complete.  Throughout the late 90's and for most of the 2000's, E-Commerce enjoyed fantastic year over year gains in sales as a higher and higher % of households began to have internet access, thus giving them access to companies that sold things over the internet.  

The Federal Reserve provides us with the data on E-Commerce sales to better demonstrate the great sales gains in the early part of the 2000's.  



Great stuff, until the market got saturated with homes having internet.  In February of 2009, Nielson reported: More than 80% of Americans now have a computer in their homes, and of those, almost 92% have internet access, according to a detailed study on home internet access from The Nielsen Company, which reports that this number is up from 77.9%  one year earlier.

I don't know exactly what the peak of homes having internet access will be, but we're nearly there I believe.  

The bottom line is, the big growth that was seen in the 1990's and early to mid 2000's in E-Commerce sales are over.  In order for Internet retailers to now grow their revenues, is to either steal market share from their competitors, gain sales from brick and mortar, or gain more customers.  Let the competitions begin!   I love this quote from this article here "the Wal-mart CEO recently commented 'If there is going to be a 'Wal-Mart of the Web' it is going to be walmart.com.'""   The E-commerce sales war will be interesting and margin tightening I can only imagine.  (Capitialists who engineer the best distribution win. There is nothing wrong whatsoever with that.  The men and woman behind these businesses deserve to be rich)

So what about Amazon's valuation today?  Frankly, it's crazy in my opinion.  Utterly overvalued.  The expectations of 26% annual earnings growth over the next 5 years is asking for a lot in this environment.  I do have a bias.  For one, I'm currently short AMZN shares.  Second, I do think we are headed for a "greater depression."  

Let's take a look at my Stock Market Value Investing Analysis Worksheet below.  


 

To start, a 5 year AAA rated bond will earn you more in income than AMZN is expected to earn in the next 5 years.  That right off the bat begs the question, why take a risk in AMZN not meeting earnings expectations and simply taking the money you would use to buy shares of AMZN and park in a safe AAA Corp. bond?

I know that Amazon will not be liquidating itself in 5 years, so this is not a "cigar butt" type of investment.  Amazon will be around for years to come.  But in 5 years, at what price?  What will Amazon be worth in 5 years I ask myself?  I'll take the analyst estimate of earnings growth and assume that in 5 years, Amazon will earn $2.644 billion in 2014.  In 2014, 5 years from now, I think AMZN will command a P/E multiple of 15, because I think AMZN can grow earnings 15% per year and I want to see the PEG ratio of 1.0.  I think AMZN is worth about $24.4 billion in 5 years.  

If I discount that at 10.21% (7% more than the 3.21% from a AAA Corp. Bond) per year or what I would demand for such a risky investment, I come up with a present value of $56.50 per share today.  Much lower than the current price of $124.64, and this is after I've upgraded them.  I've also given them the benefit of the doubt they can grow earnings 26% per year for the next 5 years.  That 28% revenue growth this recent quarter really was impressive.  

Amazon remains a highly risky investment at the current price.  Due to the current price, I will remain short for both myself and the very few (luckily) clients who are short AMZN.

Disclosure: Putting money where mouth is, short AMZN for self and few clients (2).

After teaching my Value Investing Class the other night, one of the students in my class followed up with me and asked about a local company, The Hain Celestial Group.  She asked whether I thought it was a good time to buy.  She said she read a news story about the company that was positive in the local newspaper.  I happily responded I'd take a look for her utilizing the methods I taught in the class.

First, a look at the stock chart. 




HAIN has never paid a dividend since 1994.  Judging from the chart, only if you bought shares from 1994 - 1998 had you made a fair investment.  The last 10 years have been a roller coaster for shareholders, mimicking the overall stock market more or less.

The Hain Celestial Group is in the business of manufacturing and  selling natural and organic food, and personal care products in the United States and internationally.

HAIN is expected to have revenue of $1.01 billion in the fiscal year ending June 2010 and profit of  $1.23 per share or $50 million per the average anyalyst estimate compiled by the folks at Yahoo.  

At the current market price as I write this article (17.94), the entire company (the market capitalization) is $730 million.  That makes the price to earnings ratio 14.58. Analysts also expect HAIN to grow earnings over the next 5 years at 15.3% per year.  That makes the price to earnings to growth (PEG) ratio a little under 1.00. That's right about where I like to see the PEG.

The current net asset value of HAIN is only $95.6 million however.  If HAIN was to shut down its business today, liquidate the assets and pay off its liabilities, what would be left for shareholders is only $95.6 million or only $2.35 per share.  It's currently selling at over 7x it's net tangible asset value!  That's quite a premium.  Is it worth such a premium?  

Below is the worksheet I use to calculate and make a judgment on the current valuation of the business.  To see if it's overvalued, fairly valued or under valued.  



What the worksheet attempts to do is show what you would earn in a 5 year AAA Corp. bond Vs. what HAIN is expected to earn in the next 5 years assuming you could buy the entire company and compare the two.  In this case, HAIN is expected to earn nearly 3x what you would earn in a 5 year bond.  (5 year bond rates are currently historically low however)

The other analysis shown from the worksheet demonstrates what the net liquidation value of HAIN would be after 5 years and assuming it meets its earnings expectations.  In this case, the liquidation value after 5 years is only $435 million.  A fair present value of HAIN today for such a future value would be between $269 million - $324 million.  That's only about $6.62 - $7.97 per share.

This assumes after 5 years, HAIN would be liquidating itself.  That is unlikely as I don't foresee the healthy food business becoming obsolete.

So what if HAIN meets its earnings estimates and in 5 years time is earning $88 million per year.  What would be a fair P/E multiple to put on HAIN in 5 years?  I would suggest asking what could be a potential earnings growth rate.  My answer for best case would be 15%.  This is a high estimate, but with only $1 billion in revenue in a market that seems to be gaining more and more market share as people choose healthier lifestyle choices, it's possible.  That would give HAIN a future value in 5 years at $1.327 billion.  

A fair present value based on a 5 year future value of $1.327 billion may be between $20 and $24 per share.  

The current price is a little under $18 per share today.  This would imply buying at a discount to present value, something every investor would always want to do. Buy low or buy at a discount to a fair present value.

My biggest concerns would be the following:

• Can HAIN realistically meet the earnings growth estimates of 15%?  That is quite aggressive and requires far more hours of research  to better determine.
• The balance sheet is highly leveraged.   HAIN has only $41 million in Cash as of the quarter ending June 2009.  They also have $120 million in accounts payable and $258 million in long term debt.  This is risky and gives good reason to demand a lower share price to offset this risk.  In the event we enter another great depression, something I foresee having a 51% chance of happening, a few losing quarters may puts HAIN in jeopardy.

Because of my concerns, the low liquidation value and the uncertainty of the overall economy, I want to put a fair price of HAIN in between the liquidation value in 5 years and the potential value based on a p/e of 15 in 5 years.  That is between about $7 and $22, so that would be $14.50 per share.

With this limited analysis, I would rate HAIN a cautious hold if already holding and a buy at $14.50 or less.     If HAIN gets below $14.50, before I would commit capital, I would then invest time to do more research to give more justice to committing capital to this company.

Disclosure: No Position

 

Making short term market predictions is a fool's game, but I have some observations that I think give reason for concern.

There is a chart that I started looking at recently.  It's called the NYSE Bullish % index.  It's the % of stocks giving buy signals on point and figure charts.  It gets updated daily.  You can find it on stockcharts.com with the symbol being $BPNYA.

Today's reading brings it back over 80% of stocks being bullish.  

Here is the current 3 year weekly chart.  The Slow Stochastic on the bottom of this chart looks awfully toppy and ready to turn.

I say the second time over 80% because back on August 14th, it was over 80% and when the market dropped on Monday the 17th, it appeared the uptrend in this index peaked as did the market and was headed down.

Nope.  The following 6 days have been positive closing days on the Dow making this index at that extreme reading of over 80% yet again.

Here is a chart I found of this index that goes back as far as 1987 and ends in October of 2008.  What you will notice here is that the reading has never been over 80% in that time.  (Ignore the Now part as this chart must have been created in October of 2008)  Granted, we have not had a 50% market move in less than 6 months in that time either.




This is just another one of those extreme times in the market that one may want to take notice of.

Enough of this chart business, what about fundamentals?  Are stocks cheap? Each stock is different. I'm sure there are still some good values out there.  I still like American Oriental Bioengineering (AOB), but I want to take advantage of the dear premiums in the calls so I prefer to buy the shares and sell the covered calls. Other than that, I'm having a hard time finding a stock today that I feel makes for a good long term investment that I don't think would be prone to another significant pullback in the next market correction.  

Using my proprietary Stock Analysis Calculator as a first step in analyzing a stock, I notice that a stock like Starbucks SBUX), which has had a monster rally, is now not only overbought technically, but also overvalued in my opinion.   

Looking at the weekly chart of Starbucks, you may notice the RSI over 70 and the Slow Stochastic at an extreme high.




  
Fundamentally, I think Starbucks (SBUX) is worth no more than $10 share.  I don't think the 15% per year average analyst earnings growth expectations will be met.  Per my worksheet, even if the 15% earnings growth estimates are met and I put a P/E of 12 on Starbucks in 5 years time, at best, it's worth $14 today.

Here is the worksheet for your viewing.

In summary, the short term looks mightily overbought.  A pullback that could either be perhaps a few %, or a whole lot more, could be in order.  Be fearful when others are greedy.

Disclosure:  No position in SBUX.  I'm long AOB for clients.  Short other stocks not mentioned in this article.





 

I want to point out some indicators that make me feel that a pullback in right around the corner.

I want to start with the AAII Sentiment Survey.  51% are Bullish as of Wednesday the 13th of August.  31% Bearish and 18% Neural.  For the last 2 weeks now, the Bullish Sentiment has been over 50% and the last time there were more than 50% Bulls, was in May of 2008 when the Dow was over 13,000.  A classic be fearful when others are greedy case.

I took a look at the Bullish % of NYSE chart on stockcharts.com.  This chart only goes back 3 years, but I did see a chart that went back some 20 years, and it has never been this high.   

 

 Lastly, the Baltic Dry Index has been declining now for the last 10 out of the last 11 days.  The Baltic Dry Index measures the cost of shipping materials internationally.  Does this means the global economy is cooling off again?


The second half of the year has way too high expectations.   I'm taking this chart from the great Tylor Durden of ZeroHedge to show the ludicris sales expectations.



The potential for another leg down that takes stocks back to their March lows and even lower exists in my opinion.  

Disclosure: I have some selected short positions, none of which mentioned in this instablog.

History may not repeat itself, but it does rhyme.  I have been in the camp that this is a bear market rally.  That is what I thought we would be getting in March.  I'm also in the camp that because of the need to deleverage debt in most of the developed world, we will likely be heading into a global economic depression and perhaps at worse case, a collapse in the banking system.  

I took a look at the bear market rally of 1930 and have found many similarities to our current bear market rally.  Here is a chart from MSN money of the Dow Jones Industrial Average from November 1929 to October of 1932.

Just like the cover of my book, "Put Your Money to Work," the picture depicts a reluctant "Bear" selling his undervalued shares to the savvy investor.  In due time, the savvy investor sells his shares he bought from the "Bear" to the "Bull" after the share price has risen and  become overvalued.  The whole "buy low, sell high" premise.

It was in my opinion that in February/March, when the sentiment was extremely dire, the market became so over sold a bear market rally was imminent.   

Experienced investors would know that the market would likely rally until it got to the point when the sentiment changed and the majority of investors actually believed a new bull market was in place.  The whole "be greedy when others are fearful, fearful when others are greedy" premise.

AAII investor sentiment now has 47.67% of their members who responded to their survey being bullish, 31.4% bearish and the remaining 20% neutral.  I would put that in the category of "majority believing we are now in a bull market."  70%+ were bearish around the March low.
  
I want to draw attention to valuation metrics.  I will use Starbucks (SBUX) as my example.  Here is a 2-year weekly chart from bigcharts.com.