Barron’s Replaces Henry Blodget In Pumping AMZN; Have a Taste Of the Bubbly?

Tiernan Ray, who writes the Technology Trader column for Barron’s, has a hot tip for you:  the price of a share of AMZN is going to keep moving up.  Get ‘em while you can.  In 1999 it was Henry Blodget leading the cheerleading for AMZN shortly before it both burst higher and then collapsed; now it’s the much more respected Barron’s.

Uh.Oh.

Barron’s used to cast either a neutral or skeptical eye on the Street.  It had a sort of “Where are the customers’ yachts?” point of view.  No longer.

Here is the latest offending evidence (LINK):

Still in Love With Amazon.com

Missing expectations? No worries. Just keep the sales coming for the Net’s biggest merchant.

I’m going to go out on a limb here and assert that many value-conscious Barron’s readers are baffled and even dismayed by the price action in Amazon.com (ticker: AMZN). Shares of the e-commerce giant rise when the company makes money, and sometimes rise by even more when it doesn’t.

That illogical—some say unfair—situation could persist for a while, and the shares are likely to keep climbing.  (Emphasis added)

Last Tuesday Amazon reported fourth-quarter results, and announced it missed revenue and profit estimates for the period. Its shares rose 10% in after-hours trading. They went on to notch a more modest gain of 5% Wednesday, but fell 4% to $265 on the week.

Still, Amazon shares are up 48% in the past 12 months, even as reported results swung from a profit of $1.37 a share in 2011 to a net loss of nine cents in 2012.

Just to make sure the reader did not miss the point, Mr. Ray follows the standard format of first telling the listener s what he’s going to tell them (the title and sub-title of the article), then telling them his message, then telling them what he just told them.  Thus, this is the ending of the article:

EVEN IF THE TOP LINE MISSES, the Street stands astonished at just how much stuff the company is moving between buyers and sellers. That likely won’t please readers who take a more conventional view of sales and profits, not to mention valuation, and a P/E of 70 doesn’t sit right with me, either.

But it is what most of the Street cares about. As long as Amazon increases the volume of goods whose trading it facilitates, and lures more sellers and buyers, its stock is apt to rise. 

OK, now you know that Barron’s has given its imprimatur that this unknown company, whose products no one reading the article has ever purchased, is a momentum stock with a story that is insufficiently pumped.  

Now, Mr. Ray likely knows that the occasional unsophisticated Barron’s reader will go out and try to make a quick buck or two in AMZN.  But likely more important is the insidious nature of this obvious propaganda.  What it does is define value down, as candidate Bill Clinton once said about deviancy.  With AMZN’s nosebleed valuations set as a clear overvaluation standard, lesser degrees of over-valuation can be sold to the value buyers.

As the author points out, AAPL shareholders are bewildered by AMZN’s valuation vs. that of AAPL.  I see this on the Braeburn Forum all the time (an invitation-only online Apple-oriented site where I am a moderator).  It seems not to matter how often the administrator and I remonstrate with the AAPL faithful.  AMZN bears no necessary relationship to AAPL.  For now, one is the latest Miss America and the other is faded glory.  AAPL got frothy and has quickly gone from the rare hyper-growth large-cap stock to a no-growth company.  Thus it appeals to neither growth investors nor true value investors.  And so it languishes at 10X earnings.  But – tough nuggies.  One day the same P/E shrinkage may come to AMZN shareholders; that is, if real profits ever arise.

What “should” happen to AMZN is that it either must drop in price or stand and deliver growing profits and then withstand the onslaught that COST, WMT, TGT and major ‘Net companies will begin, once they see there are actual economic profits to be had in the space (which also may lead to a drop in AMZN’s price).

What is happening in stocks is another bubble.  The Russell 2000 index (a major tracking ETF is IWM) consists of the 1001-3000 largest market cap stocks.  Many of these are small; few are world-dominators.  Many of them are covered by Value Line’s smaller stock-rating service, to which I subscribe.  I can report that few of these companies look attractive.  At least the big guys such as PG, MCD, IBM, KO are likely to be around spewing out dividends to shareholders for many years to come– I think!  Nonetheless, at the end of 2012, the IWM had a reported P/E of 25.4 (LINK).  Now, this understates the P/E for two reasons.  The major reason is that companies with no earnings are excluded from the calculation.  A fairer way to calculate the P/E is to subtract the losses from the aggregate profits and then divide to get an aggregate P/E.  The lesser reason is that all P/E’s above 60 are rounded down to 60.  Why?  No explanation is provided.

Given how much IWM has risen from yearend to now, and given the above points, I’d guess that it now trades at a 30X P/E or so, and around 3.5X book value.  Remember, few of these companies have a wide “moat” to their businesses.

The Russell 2000 index, which is said to be Chairman Bernanke’s favorite index, is therefore at the same sort of bubble valuation that the S&P 500 index was in Y2K.  Note that also as was the case in that bubbly year, not all stocks were over-valued; some had been neglected and were fated to rise substantially in price from then to the next market peak in 2007 and again to the current peak now.

This analysis is also consistent with the forlorn valuation tools of q and CAPE, which suggest that the S&P 500 is 50-60% overvalued (LINK).  To accept investing in “the market”, if one accepts that eventually every valuation metric is a dog that has its day, means accepting at least a 33% drawdown at any time merely to let stocks get to fair value, and more like a 50% drawdown for stocks to simply get to a historically mild level of under-valuation.

The Barron’s puff piece on Amazon is intellectually consistent with its role in the ’90s bubble era.  I never thought that history would repeat rather than merely rhyme, but live and learn.

More broadly,  

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1 comment to Barron’s Replaces Henry Blodget In Pumping AMZN; Have a Taste Of the Bubbly?

  • JB McMunn

    I agree. I’m having deja vu. I recall wondering why people were paying so much for AMZN back in the 90s when it seemed that as revenues rose the net became more negative.

    Then later on I found myself wondering why people thought an economy based on housing was so great.

    Now I’m wondering why the market is going up so much on what appears to be a disappointing round of Q4 EPS and GDP. IMHO shrugging off bad news is a sign that caution has been thrown to the wind.

    Oh well. Eventually the P and the E realign and as you mentioned there are only two ways to do that.