October 27th, 2011

AMZN: A New Game Plan

Sometimes, all we need the courage of our convictions in order to succeed (i.e., make money in the market). In July 2008, I put together something entitled “Amazon (AMZN): A Game” Plan”. The inspiration for the piece was the fact that AMZN “beat the Street’s consensus estimates” during the midst of the Financial Crisis meltdown. I took exception to the importance given to “consensus estimates” in a stock’s price trend; it may have impact for a day or a week but prices beyond that are influenced by much more than those hits and misses of consensus. I wrote at the time:

“Who’ll remember in a month, a quarter, a year or five years these “consensus estimates” or how they compared to actual results. On the contrary, everyone will remember only how these results compared to last quarter and same quarter last year (Have you ever seen a service that reports both actuals and “consensus estimates” for the past, say, 5 years! I haven’t). Instead, large misses from “consensus estimates” only shine the spotlight on how incompetent the professionals are and how difficult, if not impossible, it is just to get “fundamental analysis” right.”

What struck me the most was that AMZN stock had a history of gapping frequently around an earnings announcement. “The number of price gaps over the past nearly three years is impressive. Either AMZN is always pulling surprise out of their hat or Wall Street pros can never get it right”, I conjectured. I also included the following two-year chart with all those gaps noted:

Based on that repetitive behavior, I concluded:

AMZN is bucking up against the trendline extending out from its all-time high in 2000. Breaking through that resistance is a huge hurdle. It’s been building up to making a run into new all-time high territory since the credit crises set in last July (forming a poorly formed descending wedge).

Buying here at 78, given all the economic headwinds presents some risks. But a move to 110, the current all-time high represents a 37.5% move. But there’s no telling whether it will make it there or when, whether the breakthrough attempt will be successful or not and when and, if successful, how much of a secondary, post-breakout consolidation will it take before a huge upward move can get started (these often happen and can take any consolidation form).

So here’s my game plan. The 37.5% looks enticing but I think I’d pass it up and wait for the big move above 110.

On October 23, 20009, almost exactly two years ago, AMZN announced their 3rd quarter 2009 results and the stock gapped up 26.8% for the day to close at 118.49. The stock broke above my threshold should have been the signal to buy … but I didn’t and lost the opportunity for a 113% move to the high of 258!

AMZN today reported a 73% drop in third-quarter earnings and the potential for a fourth-quarter operating loss and the stock gapped and closed down 12.66%. Will this be a repeat performance? I think not. Rather than looking at that flawed measure of actuals vs. “consensus estimates, look at AMZN’s actual results:

AMZN is an extremely seasonal business with 4th quarter’s Christmas holiday shopping representing 35-40% of annual sales. The best way to see how the company is performing is on a rolling 4-quarter basis. The above chart indicates annual sales and EPS for 2005-2010 and rolling 4-quarter for each quarter in 2011. I shouldn’t have been a surprise to those high-priced Wall Street analysts that AMZN’s performance was waning. It’s been evident since the March 2011 quarter. And we don’t need management to tell us that it is nearly impossible for 2011 to beat 2010 and their statement that fourth quarter will be negative only raises serious questions about 2012.

Bottom line, all great runs ultimately come to an end and AMZN could now look like a great short candidate.

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