By Joseph Hogue, CFA
Projections for retail sales and consumer spending for this year’s holiday season will soon fill analysts’ notes. One name is always included in the hype, and could see some strong upward momentum in the next two months: Amazon (AMZN). The online retailer has expanded its business model from books in 1995 to an internet behemoth, selling just about anything found on traditional brick-and-mortar shelves. The U.S. still accounts for the majority of sales at 55% of net revenue in 2010. The company benefits from an extremely strong brand identity and an increasing trend in e-commerce sales as a percentage of total consumer expenditures.
Though 3rd quarter EPS came in below consensus at $0.14 (consensus of $0.24) and the shares are extremely expensive at about 115 times trailing twelve months earnings, there are some short-term trends that may support the stock in the coming months.
Consumer Sales
Consumer spending has been surprisingly strong, given historic lows in confidence and the economy in general. Spending in the third quarter increased at a 2.4% annual rate with September’s figures coming in above the quarter average, denoting an upward momentum. Retail sales for October come out on Tuesday.
Excluding auto sales, retail numbers for September were relatively strong, with an increase of 0.6% with gains at both department and clothing stores. On top of this, Bloomberg reports last year that Cyber Monday sales increased 16% over the year before, exceeding $1 billion for the first time. The same report showed that Amazon accounted for 7% of total online sales, up from 6% the year before.
Naysayers will point to the drop in the savings rate from 5.3% in June to 3.6% in September as funding the pickup in consumer spending. While a continued drop in the savings rate cannot fuel spending alone, it may give the economy enough of a jumpstart to gain some kinetic momentum.
U.S. Economy
All the headline risk out of Europe has acted to hide much of the trending optimism in the U.S. economy. While a 2.5% GDP is not the rebound we would like to see, it is a relatively welcome increase when compared to other developed markets.
Initial jobless claims recently fell below that all-important 400,000 mark that signals a recovering labor market. Though one week does not signal a turnaround, coming weeks may validate some strength in the recovery. If initial claims continue under the 400,000 mark and the upcoming non-farm payrolls report is positive, look for a significant upward trend in the market.
The lack of real income growth presents a risk to the company’s sales. Real after-tax income plummeted by 3.1% in the third quarter largely as a result of the sluggish job picture and increasing fuel and food prices. Continued weakness in real income could cause people to pull back on those discretionary items that Amazon sells.
Strong Seasonal Trend in Share Price
Looking at data back to 1997 presents a strong argument for seasonality in Amazon shares. Data on the shares from November 10 through 4 quarter, reporting around the end of January for each year back to ’97, shows an average gain of 22.8%, and just four of the fourteen periods seeing negative returns. Excluding the returns of the three most extreme periods of 2001 (120%), 2000 (-35%), and 1998 (186%) evens the average out to a respectable 4.8% over the two-month period. This compares with an average return for the S&P500 of 2.9% in the same years.
While the volatility across each period for the S&P is lower and the index only saw negative returns in three of the periods in the sample, the average return is almost 2% lower. Though past performance does not guarantee future results, combined with a positive trend in retail sales could make for an attractive investment.
Short-Term Risks
Risks to the company’s shares are primarily in headline risk out of Europe and a breakdown of the positive trend in U.S. economic and retail growth. Though the news out of Europe has been net positive over the last couple of weeks, most analysts foresee continued downward risk. The fact that a new group of political actors has been charged with the solution does not change conditions in which the problem exists. Growth forecasts for the EU in 2012 have been lowered to just 0.5%, which makes it basically impossible to grow itself out of debt problems. It is yet to be seen if the eurozone has the political or social will to endure necessary austerity measures.
Investors may want to hedge against headline risk out of Europe with a short in stocks or funds with a disproportionate amount of exposure to the region. Companies with a larger portion of revenues from the eurozone or European financials would make for a good hedge on U.S. retailers like Amazon. The SPDR S&P International Financial ETF (IPF) has nearly half of its holdings in eurozone financials making it a good hedge against systemic weakness in the region. I have been using it as a hedge against a long position in the U.S. financials since September, but it can also be used to hedge eurozone risk in other investments.
The shaky ground on which the U.S. economy finds itself threatens a risk to the upward momentum in job growth and retail sales. Though the trend should remain intact through the holiday shopping season, investors may want to hedge their exposure with a short position in the general market. The seasonal strength in Amazon shares could mean that it outperforms the S&P500 even if economic trends weaken. Investors could short the SPDR S&P 500 (SPY) against a long position in Amazon to help remove general economic movements from the investment.
The coming month, leading up to Black Friday and Cyber Monday, could see heightened volatility from European headline risk and worries that the retail season will fall flat. A strategy of buying into positions in Amazon with a laddered approach leading up to the end of the month could be profitable. Retail figures for Cyber Monday start leaking out around the beginning of December, so the stock could see strong upside if sales are good.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
No comments:
Post a Comment