Two days in a row! My thoughts on the Monday global selloff in stocks are on my Current Market Tactics page.
Category Archives: Recent Market Action
Current Market Tactics, August 21, 2015
After a boring year to date, I’ve finally made a new entry on my Current Market Tactics page.
big day for Amazon (AMZN)–why?
AMZN reported 2Q15 results after the close last night. They were very good.
Sales were up 20% year-on-year; expenses rose by 17%, three percentage points less. As a result, the company reported an operating profit of $464 million vs. a loss in the second period of 2014.
More than that, AMZN’s cloud services division, AWS, had revenue growth of 81% yoy and a quintupling of segment profits (basically operating profits less stock option expense) to $391 million. AWS, broken out as a separate segment for the first time after 1Q15, remained a bit more than a third of the AMZN total.
AMZN posted an overall profit of $.19 a share for the quarter, vs. analysts’ expectations of a loss of $.13 a share and a deficit of $.27 per share in the year-ago quarter.
On the announcement, the stock immediately rose by 15% in aftermarket trading.
AMZN opened up by 20% this morning, before drifting down steadily during the day to close +9.8% in a market that was down just more than 1%.
Why the strong advance?
I have no good explanation, although I do have some ideas.
1. The obvious factor that changed overnight was the earnings announcement.
It contained a significant positive earnings surprise, one that makes it more likely that the company will earn, say, $1- a share in the current year. It makes the analyst consensus of $2.78 a share for 2016 more believable. On the other hand, the stock was trading at $482 before the earnings report, or 173x the 2016 consensus. Looking at the stock price another way, let’s say that at maturity for its businesses (whenever that may be), AMZN shares will be trading at 20x earnings. To sustain the pre-earnings report price, that would imply a burst of rapid growth that shoots earnings up to around $24 a share. That would be something like a doubling of earnings each year for the next five or six.
That’s already baked in the cake. A buyer of the stock at this level must believe that $24 a share in eventual earnings is way too low.
I find it hard to believe that a $.32 per share earnings surprise during one quarter–when expectations were already sky-high=-would be enough to add 20%, or even 10%, to AMZN’s perceived market value.
2. A second hypothesis…
What if investors are beginning to separate AMZN into two parts, AWS and everything else, and are doing a sum-of-the-parts evaluation. To me, this sounds a little more plausible. What would the numbers look like?
Let’s say that in 2016 AWS will comprise half of AMZN’s earnings and AMZN Retail the remainder. To make the figures easier, let’s say each half earns $1.50 a share next year.
Let’s assume AMZN retail can grow in earnings at 20% a year for a long time, and that we’d be willing to pay 50x current results–a big number for a retail stock–for that future profit stream. If so, AMZN Retail is worth $75. To reach a sum-of-the-parts value of $482, AWS must therefore be worth about $400, or close to 270x its 2016 eps. Ok, while I personally wouldn’t be willing to pay that much for AWS, I can see how someone else might. However, I still don’t understand why confirmation that a holder at 270x earnings isn’t insane would cause the multiple to expand. (Also, before I’d be comfortable valuing AWS as a separate company, I’d want to know more about how AMZN apportions revenues and costs among segments to ensure the published numbers don’t flatter AWS. I’d also think long and hard about the possible effect of stock options.)
3. The explanation for AMZN’s rocket ship ride that I’m leaning toward, however, is more technical. Two factors may be involved. At what Google Finance reports as 21+ million shares, today’s trading volume in AMZN was 7x normal. The sharp opening spike suggests to me that algorithmic trading computers were at work reacting to the earnings report, not humans. Humans, I think (?!?), would have a better sense of valuation. I also suspect that the report and immediate upward move triggered a lot of short covering.
I’m partial to #3 because I think the whole reaction is a little crazy.
Why is any of this important? AMZN is a high-profile, large-cap stock with almost two decades of operating history. There’s got to be a way to make money from the possibility that something like AMZN’s big move will occur with other similar names.
three weird things that happened this week
1. Greece After months of vitriolic negotiations and after calling a referendum in which it successfully campaigned to have Greece vote against accepting a financial bailout from the EU/IMF, the Greek government appears today to have accepted that bailout.
2. Chinese stocks After plunging for a month, Chinese stocks have risen by 10% over the past two trading days. The world is breathing a sigh of relief. I’m not sure what’s weirder–that this happened or that foreigners believed for a short while that in a country where doing anti-social stuff can get you either a long prison term or beheading, rather than the cover of Forbes, China would be unable to achieve this outcome. Actually, the foreign belief is way weirder.
3. Microsoft/Nokia Less than fifteen months after acquiring the cellphones business of Nokia, MSFT has discovered that what it bought for over $7 billion (led by mastermind Steve Ballmer) is essentially worthless and is writing off virtually the entire purchase price. The stock went up on the news.
Which is weirder: that the MSFT board that rubber-stamped this disaster is still intact? …or that people are still buying Clippers season tickets? I suppose you could argue that Nokia was the price for getting rid of Ballmer, which would imply that the behavior of Clippers fans is weirder.
navigating the next twelve months (i)
As I wrote on Friday, I think we’re at an inflection point in the US stock market. It seems to me the market is now beginning to take seriously the idea that the Fed will soon be beginning to raise interest rates from the current near-zero.
In one sense, this is not Wall Street’s first rodeo. There are plenty of times in the past when the Fed has been reversing emergency monetary accommodation applied during a recession. The investment community has already sifted through them ad nauseam.
On the other hand, the extent and duration of the current monetary easing are both without precedent. At the same time, the way the market factors new information into stock prices has changed considerably over the last decade. The goals and risk preferences of the Baby Boom, the most powerful retail influence on stocks, have shifted as well, as that generation has aged.
Boomers are more interested in income than in capital gains. Hedge fund managers and algorithm-fashioners seem to have very short time horizons–almost reacting to information as it hits the news media rather than anticipating it. (I almost cringe to write this last. It reads a lot like the criticisms made by elderly patrician money managers of the past (whom I made fun of at the time) who held stocks for decades at a time and were struggling to adjust to the faster-paced market of my early years on Wall Street. Still, I think what I’m saying is correct.)
Therefore, I think, we can’t just blindly apply generalizations from the past to our present situations.
two types of tightening
It’s important from the outset to distinguish between two types of Fed tightening:
–restoration of the real rate of interest from negative to positive as the economy recovers from recession, and
–raising the real rate of interest substantially above inflation in order to slow down an economy that’s potentially overheating.
Today, we’re dealing with the first kind, not the second.
what the past tells us
During past periods of Fed tightening of the first type, stocks have been volatile but have generally gone sideways to up. Bonds, on the other hand, go down.
This, in itself, has implications for stock market strategy. Stocks that resemble bonds the most tend to do particularly badly; (at least some of) those that resemble bonds the least do the best.
More tomorrow.