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BS in Economics, MA in Public Policy (International Economic Policy). J is a well-known voice in the global shipping community, with unparalleled investment results and a penchant for activist investing. Mintzmyer founded Value Investor's Edge, a top-ranked deep value research service in May... More
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  • Massive Downside Trade Opportunity On Amazon 35 comments
    Jan 23, 2014 2:34 PM | about stocks: AMZN, NFLX

    This is an extremely speculative opportunity that I wanted to share with my followers, but it's not something I really 'recommend' from an investment perspective (prudent management of money). Either way I wanted to share my thoughts on the trade and potentially get some feedback on my thoughts prior to expiration. Since it's such a speculative position, I didn't want to submit this as an official 'article.'

    After watching JCP, SHLD, BBY, M, GME, KSS, COH, TGT, BBBY, ARO-- virtually every retailer report disappointing results, I had two thoughts:

    1) B&M (brick+mortar) is getting killed by online-- namely Amazon (NASDAQ:AMZN)

    2) Wow, the whole retail sector is getting crushed across the board.

    ---------

    After watching BBY boost online sales by 28% and still get crushed by over 30% the next day, I realized the market was on serious pins & needles with their 2012 top stocks. Hell, GME beat on revs and only slightly missed on EPS and they took a 22% beating also.

    This led me to four subsequent observations and beliefs:

    1) The stock market has a lot of underlying nerves/tension, especially with the top gainers from 2012: (BBY, NFLX, LNKD, FB, TSLA, GME all fell into this group-- 2/2 had reported mediocre results and 2/2 got massacred)

    2) Perhaps the ENTIRE economy is weak. INTC is hurting, AAPL is slow growing, car sales are tepid, home figures are jumping around, interest rates are creeping back up, unemployment #s are bad (14% according to U-6, which is the REAL measure imo).

    3) Amazon revenues are out of line with either a weakening economy or the quarterly trends they've established. Amazon is priced to not only steal massive shares of holiday shopping from B&M stores, but they are priced for a roaring consumer economy.

    4) Amazon trades at a clear correlation to revenues (P/S). No other metric can value or describe their recent stock marketperformance.

    Belief #1 was a major underpinning of my earnings trade on NFLX. My long-term thesis has been outlined in detail, but my earnings trade was based more on weak forward guidance. I also believed that NFLX had far more negative pressure than 'bull pressure.' NFLX beat expecation (slightly) and BLEW OUT forward guidance and they went up 15-16%. If they had missed, I firmly believe it would have been a -30 to -40% bloodbath. But anyways, my point on bringing up NFLX is that my belief #1 might be flawed. Perhaps not every 'huge flier' from 2013 is under immense market pressure. I suppose we won't know for sure until after AMZN, LNKD, FB, and TSLA have all reported.

    Belief #2 is pretty self-explanatory, feel free to debate if you will, but I think the facts are pretty solid.

    Belief #4 (coming back to 3 below) is also well established. Look at Amazon's revenues and stock price back 2-3 years. Pretty tight correlation. AMZN has no earnings, little free cash flow, marginal operating cash flow, no dividend, an iffy balance sheet, yeah... P/S is the only thing that sorta makes sense.

    ---------

    So? Is Amazon's growth expecation far out of line? Check this out:

    This is a chart I made showing the past 4 years of sales growth and including the mid-point of revenue expectations-- $26.03B or 22.5% growth. Keep in mind this is the midpoint, range is $25.27B to $26.74B (18.8% to 25.7% when compared to $21.27B last year).

    The chart looks okay right? You see the downtrend due to law of big #s, and a slight uptick in Q3. Note that Q4 is higher than Q4 the year before and Q1 and Q2 of the same year. That's a bit odd right? Expected growth acceleration at the tail-end?

    Now check THIS chart out that shows the seasonality/cyclicality of growth:

    Notice the massive gap that holds steady in the range of 6-9% (6, 9.33, 8% to be exact)? Then suddenly (poof!) it's gone. Something doesn't add up here folks.

    Then I tried something else-- a fellow contributor told me about a strong Google Trend on the terms "Amazon Christmas" that showed a correlation to previous Q4 sales. That search term was up suggesting a strong growth in sales. However, I tried Google Trends for "Amazon.com" and "Amazon" and check this out!

    (click to enlarge)

    Ok-- so you can see the growth in AMZN right? But check out the growth differential from 2012 to 2013 (13.7%) and this year (2.7%). Not looking good.

    Now, this trends figure doesn't really tell us a lot as it really reflects more of a combination of both news interest and unsophisticated internet users. You'd be surprised how many people navigate to every site through google though-- and with Chrome or Firefox, it's easy to get into the (poor practice) habit.

    The trends imo are a good measure for unsophisicated users... and/or AMZN's new clients. The old/hardcore clients such as myself have been using Amazon for 5+ years and have it as a click favorite. My mother has it as her homepage! There aren't a lot of people out there that don't know how to use Amazon.

    That being said-- Amazon also depends on a ton of existing customers spending MORE. I don't have a proxy for that, but I believe that strongly correlates to the strength of the economy and retail in specific-- all signs show that both are medicre this season.

    ------

    In conclusion:

    --Seasonality and trends are projecting far slower growth, something in the range of 15-20%, but analysts are expecting 19-26%

    --Google Trends data is extremely weak (in terms of growth)

    --The economy itself and especially the retail and electronics/tech sectors are weak

    --Amazon is trading at P/S multiples so meeting and/or beating expectations is EVERYTHING to this stock

    The trade:

    I asked a buddy of mine-- if you have a trade with a 30-40% potential of being a 20-bagger would you take it?

    My trade is as follows: $370 Feb7 puts for approx. $4-$5 (I paid $4.20)

    If I'm wrong, and AMZN beats, they will probably expire worthless.

    If I'm close and AMZN ties, you have a good chance of breaking even (only takes a 6% drop the week after)

    If I'm right and AMZN misses, you will have anywhere from a 10-bagger ($330--17.5% drop) to a 25-bagger ($270--32.5% drop).

    This is the best trade opportunity (in terms of profit potential and related risk) that I've seen in my entire career.

    I've seen several chances to gain 50% in a short amount of time with something like USU or OCZ puts (many of my followers made lots of money on both of these), and I've seen a few no brainer plays like long straddles on NFLX, but I've rarely seen something with a 30-40% chance of occuring and a 10-25x payout.

    ----------

    As I said, this is super speculative and scary, so I didn't want to put into an article. I'm long 4 contracts- if my NFLX trade (otm puts) had panned out, I was considering as many as 10-15 contracts.

    DISCLAIMER: I'm just sharing my opinion here. This is really risky stuff and frankly kinda stupid. I am NOT a registered investment adviser, I am just a personal stock blogger who likes to share his opinions on possible actions.

    Disclosure: I am short AMZN, NFLX.

    Additional disclosure: I am short AMZN via $370 puts that expire on February 7, I may add more or roll the strike at any time. I am short NFLX via $290 puts that expire Jan24, $300 puts that expire Jan31, and $170 puts that expire Jan 2015.

    Stocks: AMZN, NFLX
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Comments (35)
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  • Copious28
    , contributor
    Comments (444) | Send Message
     
    Sometimes crazy works. Forgive me for not following retail closely enough and asking a stupid question: but I was wondering the impact weather had on the last quarter results from B&M? Couple that with UPS failing to keep up with promised deliveries (likely an Amazon Prime effect). I was thinking the other way with Amazon, that they steal the show.

     

    I have no positions.
    23 Jan 2014, 02:53 PM Reply Like
  • J Mintzmyer
    , contributor
    Comments (8195) | Send Message
     
    Author’s reply » Copious- I think you're on the right track with the analysts with the UPS stuff; however, I think UPS was due to multiple factors beyond just AMZN.

     

    First of all both delivery companies were running to the bone with cutbacks and optimization and failed to bring enough part-timers to work. I personally know a guy who had to work 16 hour days including Christmas Eve.

     

    Second-- delivery companies were hurt/delayed by the weather, this stalled many trucks and planes.

     

    Third-- Delivery companies goofed with some of their routing. I had an item from a seller on Ebay that took 9 days to arrive with 5 day shipping (usually takes 2-3 days) because UPS sent it to Minnesota instead of Arizona-- seriously wtf?!

     

    Fourth-- Every single retailer is pushing more and more online-- look at Best Buy's 28% y/y gains. This also includes a lot of shipments from 3P (third parties -- 'marketplace') on both Amazon and Ebay.

     

    -------

     

    So in conclusion, yes you're spot on that traffic of deliveries was up, but there were multiple players besides Amazon, and the delivery companies themselves really screwed up all across the board. It's easier to blame it on "unexpected volumes" than "poor logistical management."
    23 Jan 2014, 03:03 PM Reply Like
  • Darren McCammon
    , contributor
    Comments (3806) | Send Message
     
    The logic is sound. As far as risk, that is controlled by buying the put (instead of a position based on selling a call), position size and understanding that the most likely outcome is the position expiring worthless (100% loss). These aren't bad trades as long as you control the position size. The danger is in what you said about, if your NFLX has worked out, the next one would be much larger. This is a gambler mentality and leads to you continuing to play with larger and larger stakes until eventually the house wins and you walk away with no money. Your previous win should not convince you that your gods gift to investing and therefore should take larger positions. The fact that you got a straight flush the last hand shouldn't cause you to play looser the next one.

     

    Enough analogies, you get it.

     

    P.S. Since these companies are trading completely on emotion and momentum, I would have thought you would have at least mentioned what it looks like from a technical analysis viewpoint.
    23 Jan 2014, 03:04 PM Reply Like
  • J Mintzmyer
    , contributor
    Comments (8195) | Send Message
     
    Author’s reply » Darren,

     

    I agree 100%, but I think you might have misunderstood my allocation statement. The reason I'm taking a small position now isn't because I feel "worse about my performance," it's because my trading account suffered a big loss- I lost close to 3% of my portfolio, or 20-30% of my 'play' money on NFLX.

     

    If I'd nailed NFLX, I'd have more money allocated for trading/speccing, plus it would also reinforce the belief about high-fliers being under specific pressure.

     

    The much more dangerous 'gamblers mentality' is to try to increase my AMZN play to "make up" for my failed NFLX read.

     

    -----

     

    tbh, I think technical analysis is complete bs with the exception of moving averages and hi-low spreads showing general market sentiment. With that in mind AMZN is at all time highs and momentum has stalled over the past 2-3 months. In essence we have a lot of baked in (expected) optimism and a LOT of people holding their breath.
    23 Jan 2014, 03:12 PM Reply Like
  • tradebr2010
    , contributor
    Comments (1344) | Send Message
     
    J,
    How about a straddle? on AMZN. A trader once taught me:
    You should always allocate 2% to 5% tops to a trade, use only 50% of your capital, cap losses at 2%.
    That's the recipe for long life in trading!
    23 Jan 2014, 03:29 PM Reply Like
  • J Mintzmyer
    , contributor
    Comments (8195) | Send Message
     
    Author’s reply » trade,

     

    As I mentioned in the stocktalk, a straddle might be 'ok' for a big player, but at 7.5%+ IV versus historical volatility not much higher, it's nowhere near as attractive as NFLX was at 9% IV versus 15-16% historical.

     

    If AMZN reports in-line, there's a good chance you could be pretty flat, and my on-sides approach has a similar breakeven to the straddle.

     

    The difference is if AMZN blows out expectations, a straddle could still give you a bit of a pop.

     

    ------

     

    If I was running a trading portfolio with client money, yeah I'd stick to something like a slightly otm straddle (strangle) maybe $390p $410c. The reason being that if the results are so boring that you don't blow through those, they'll probably be so boring that it won't go anywhere.

     

    In my shoes, I see a 30-40% chance of a 10-bagger- that's $326 or a 18.5% drop. If I pull the straddle I get a return of 246% ($74/$30).

     

    This might be biased by my expectations for AMZN price action, I see roughly 30-40% down, 30-40% flattish 20-30% up. Upside I see maybe 10-15%, downside 20-30%.

     

    Speaking in terms of EMH and options arbitrage, the expected outcomes should be on a normal distribution- bell curve. Hence the pricing of puts/calls at the same levels.

     

    Typically, however, puts are cheaper than calls due to an inherent bull-bias. With NFLX and AMZN I've seen times when the puts are more expense- which is unusual for the market, but makes sense for the 'high flier' category. Right now they are pretty even.
    23 Jan 2014, 03:39 PM Reply Like
  • Thomas S Hunter
    , contributor
    Comments (15) | Send Message
     
    Interesting thesis and trade J. Curious, where did you come up with the 30-40%? Or are you just estimating based on experience?
    23 Jan 2014, 03:35 PM Reply Like
  • J Mintzmyer
    , contributor
    Comments (8195) | Send Message
     
    Author’s reply » I pulled that number from where the sun doesn't shine.

     

    Seriously though before I ever price options, I run through EV in my head and then go see what they cost. Amazon has a habit of meeting/beating, but the expectations are higher than they have EVER been for this company.
    23 Jan 2014, 03:44 PM Reply Like
  • Steven Couche
    , contributor
    Comments (295) | Send Message
     
    Let's roll papa, 1 contract on black. It's all about the google searches.
    23 Jan 2014, 03:42 PM Reply Like
  • J Mintzmyer
    , contributor
    Comments (8195) | Send Message
     
    Author’s reply » Appreciate the sarcasm- like I said it's a radical trade.

     

    I can almost guarantee you this is the best odds you'll see at a 10-20 bagger in your lifetime. If you believe there's as little as a 5-10% chance the market doesn't like what AMZN reports, this is a clear easy trade.
    23 Jan 2014, 03:45 PM Reply Like
  • Steven Couche
    , contributor
    Comments (295) | Send Message
     
    I bought the put, I'm short DDD and want to get short TSLA and NFLX, mostly through options or pair trades. These names are all way overbought and radically priced.

     

    Maybe I'll get the courage to buy another contract next week. Eventually these names will falter as DDD has begun to do.
    23 Jan 2014, 04:07 PM Reply Like
  • Clayton Rulli
    , contributor
    Comments (3408) | Send Message
     
    J

     

    Were you able to decipher any hints from the shippers? FDX UPS? If there was a way to look at their volumes for the holidays we could get a hint of Amazon's performance
    23 Jan 2014, 03:59 PM Reply Like
  • J Mintzmyer
    , contributor
    Comments (8195) | Send Message
     
    Author’s reply » FDX reported for the quarter ending November, so not hitting December, their revenues were up 3%. Not impressive. BUT I think $AMZN has mostly fixed deals with these guys.

     

    UPS:

     

    On December 23, UPS delivered more than 31 million packages, the most ever and 13% over the prior-year peak day. This year’s highest delivery day occurred six days later than expected and was 7.5% greater than planned.

     

    -----

     

    Good volumes but nothing crazy considering AMZN is expected to do 22% up, they are the largest online player, and everybody is also pushing more online. UPS volume boost of 13% doesn't say much...

     

    Also it's hard to tell the average value per box and how many items per box..
    23 Jan 2014, 04:40 PM Reply Like
  • InvestorD
    , contributor
    Comments (4) | Send Message
     
    Amazon upped their free super saver shipping from $25 to $35. While the volumes didn't go up much, the value of the content in the amazon boxes likely increased a good 30%
    28 Jan 2014, 01:30 PM Reply Like
  • J Mintzmyer
    , contributor
    Comments (8195) | Send Message
     
    Author’s reply » While the hike represented a 40% increase to the minimum for Super Saver Shipping, of maybe 30 orders I've done an Amazon in this category, I can only remember twice when I was under $25 and had to add more items. Both times it was because I was buying one singular item like a video game or paperback. For Christmas shopping, I'm assuming most orders were $60-$200+. I don't have data on this though, but I'm assuming the practical impact on shoppers, especially during the Holidays, was very negligible.
    There was zero effect to Prime members, who account for most of the high-volume as well.
    While I'm not saying the minimum had NO impact on value/box, I think 30% is a massive stretch. Also keep in mind that sometimes AMZN will take a 3-4 item $60 order and send 2 or even 3 boxes out.
    28 Jan 2014, 01:52 PM Reply Like
  • embryorambo
    , contributor
    Comments (281) | Send Message
     
    How many puts did you buy J, that will tell me all i need to know about your conviction, i'm considering rolling the dice with you on AMZN. Love the company, dislike the valuation
    23 Jan 2014, 04:15 PM Reply Like
  • J Mintzmyer
    , contributor
    Comments (8195) | Send Message
     
    Author’s reply » I rarely disclose this type of info, but--

     

    It says in my article- 4. That's roughly $1700 worth. I turned 23 last November, so that's not a trivial amount. I can't disclose that % of my portfolio value, but it's a good portion (approx. 20%) of my 'play' money.
    23 Jan 2014, 04:37 PM Reply Like
  • Clayton Rulli
    , contributor
    Comments (3408) | Send Message
     
    J... thanx for sharing. What do you think of buying a higher strike to maximize probability, perhaps use mini contracts but buy more of them?
    26 Jan 2014, 11:29 AM Reply Like
  • J Mintzmyer
    , contributor
    Comments (8195) | Send Message
     
    Author’s reply » Higher strike= slightly higher chance of breakeven or profitable range, but less chance of a multi-bagger as well.

     

    I think any of the strikes $390-$360 are attractive at the current pricing.

     

    Gotta understand though, with $370 or lower, your chances of a $0 are higher than your chances of making money. This is a true 'gamble.'
    26 Jan 2014, 12:37 PM Reply Like
  • tradebr2010
    , contributor
    Comments (1344) | Send Message
     
    J,
    Got it. That's what I call a "lotto" trade, and I do those once a year, or If I'm having a great year, more frequently!

     

    I don't trade high fliers prior to earnings, and I'm sitting this one out.

     

    If history serves me right, Amazon can trade to a P/E of a million and still go up!
    Good Luck,
    Marco
    23 Jan 2014, 04:41 PM Reply Like
  • DBrooks22
    , contributor
    Comments (26) | Send Message
     
    Interesting idea. But wouldn't you rather get ~24% more options with the Jan 31 expiry than pay an extra 24% for the extra week? (Using current prices)
    23 Jan 2014, 04:42 PM Reply Like
  • J Mintzmyer
    , contributor
    Comments (8195) | Send Message
     
    Author’s reply » Probably a smarter call Marco- I enjoy your feedback.

     

    Brooks,

     

    Negative- b/c Jan31 only gives me 1 trading day. If I'm going for 25 bagger all or nothing, then yes. But if AMZN reports in-line, I get a free second chance at a break-even to 3 bagger with the 2nd week as the news sinks in.

     

    If AMZN reported on say Tuesday instead of Thursday, I'd take the Jan 31s.

     

    Put another way if AMZN goes under $340-$350 on Friday I'll probably take 2 off the table. Under $320 probably take all off the table. $360 or higher, I get another week. Jan31 doesn't give me that kind of flexibility.
    23 Jan 2014, 04:49 PM Reply Like
  • DBrooks22
    , contributor
    Comments (26) | Send Message
     
    Agreed. Also, after a move like that the Feb 7 puts will have a lot of implied volatility still built in. And it gives you an extra week for the follow-on dumping that would likely occur. A move that big would trigger more selling by retail folks.
    23 Jan 2014, 05:26 PM Reply Like
  • embryorambo
    , contributor
    Comments (281) | Send Message
     
    Mintz i've been following your ideas and SA comments for some time
    I'll roll the dice on this with you
    23 Jan 2014, 05:17 PM Reply Like
  • Rico Kastilani
    , contributor
    Comments (169) | Send Message
     
    J,

     

    As tempting as it is, I do not dare to short or buy puts on Amazon after seeing Netflix......

     

    Good luck!

     

    Rgds,
    Rico
    23 Jan 2014, 10:59 PM Reply Like
  • Nathan Brooks
    , contributor
    Comments (559) | Send Message
     
    Amazon tends to trade not on P/S but on total gross merchandise value. I.e. including third party selling transactions. that growth is still pretty high, around 25%.
    25 Jan 2014, 07:30 PM Reply Like
  • thaze
    , contributor
    Comments (30) | Send Message
     
    Had a good year thus far following you on other trades and suggestions you've provided - might as well jump in head first with you on this one as well. Never hurts to roll the dice every once in a while to make things interesting...

     

    Long (2x) Feb 7 380 puts
    26 Jan 2014, 10:37 AM Reply Like
  • J Mintzmyer
    , contributor
    Comments (8195) | Send Message
     
    Author’s reply » Glad it worked out thaze-- I hope you bought Thursday and captured the massive market slide on Friday.

     

    If not, I still think it's an attractive bet, but the options went up 50% from Thurs to Friday as the market sunk.

     

    To be clear, this is a big 'dice roll,' higher chance of a $0 than a payout.
    26 Jan 2014, 12:36 PM Reply Like
  • Steven Couche
    , contributor
    Comments (295) | Send Message
     
    J,

     

    What do you think about taking the 75% gain and buying 2 $340's for approx. $2? I guess you would have to get a miss, but would be playing with house money. My gut tells me they come in at the low end of guidance, which the $340's probably won't hit with that.

     

    Thanks.
    28 Jan 2014, 09:16 AM Reply Like
  • J Mintzmyer
    , contributor
    Comments (8195) | Send Message
     
    Author’s reply » Gettin,
    From a risk perspective, if I was playing 'safe,' I would have taken the 100% profit and bought some $350s or $340s.
    However, that brings additional risks as well. It's not really the "house" money- it's YOUR money either way. As you said, if it goes all the way down to say $340, you ended up what, breakeven? If you stayed pat with the $370s you are now sitting on a 7-8 bagger.
    If AMZN misses they will probably hit $340 easy, maybe as low as $300. If AMZN reports somewhat in-line, they could also hit $350-$370.
    28 Jan 2014, 12:53 PM Reply Like
  • thaze
    , contributor
    Comments (30) | Send Message
     
    I actually started the trade when you did, I was just late to post it here. I took my profits on the slide Friday and plan to re-roll them tomorrow. Quick and easy short term profit.
    28 Jan 2014, 06:24 PM Reply Like
  • J Mintzmyer
    , contributor
    Comments (8195) | Send Message
     
    Author’s reply » Glad you captured it. I'm in for the long haul (1 week! lol) for earnings Thursday.
    28 Jan 2014, 11:29 PM Reply Like
  • J Mintzmyer
    , contributor
    Comments (8195) | Send Message
     
    Author’s reply » I went long (8) $385 calls this morning for around $2.75. I wanted to 'hedge' my position against the inevitable afternoon barrage of upgrades.

     

    I sold half my position (2) of $370 puts approx. 5 minutes ago for $8.75, broad market is picking up and leaving $AMZN behind, I think AMZN will track in a few minutes off the consumer confidence data.

     

    While I'm not impressed with the data, and I think AMZN is a joke, it doesn't really matter what I think. Big boys don't care.

     

    Anyone still holding these puts I'd suggest selling between 50-100% of your position and taking your 100%+ profits. Don't get greedy fellas.

     

    If the market recovers next week and/or AMZN gets upgrades, we could see $400-$410 next week easily...
    31 Jan 2014, 11:17 AM Reply Like
  • tradebr2010
    , contributor
    Comments (1344) | Send Message
     
    J,
    I think $AMZN had a stellar quarter but not for analysts, and the 5% pump/dump that happened yesterday.
    31 Jan 2014, 02:25 PM Reply Like
  • J Mintzmyer
    , contributor
    Comments (8195) | Send Message
     
    Author’s reply » Just to give everyone a fair trade update, I sold the last 2 of my puts ($370s) at $12.90 and rolled into 4 puts ($350s) for $3.10.

     

    This allowed me to take 1/2 the money off the table, with a breakeven point at $330 and 2x profits from $330 on down. Personally, I think if you are up 3x on these puts it's probably smarter to just take your profits and walk out with a giant grin on your face-- but I'm being greedy here.

     

    My net position for next week is (7) $385 calls (3) $380 calls and (4) $350 puts. I'll make money in total from $349 or lower or $385.50 and higher. If AMZN ends next week in that range (and I don't close one of the positions-- unlikely) then I lose around $300 in total.

     

    Obviously I stand to make a very good deal on either the upside or the downside.

     

    For anyone who followed the gamble here, please don't get greedy. I'm glad this position worked out for us.

     

    Have a wonderful weekend everyone!!!
    31 Jan 2014, 03:53 PM Reply Like
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