Buy Side forecasting tool says while the Kindle may dazzle, Amazon’s stock doesn’t
Let’s face it: Amazon’s online business model and Kindle e-book readers are a lot sexier than Macy’s bricks-and-mortar business selling everything from kitchen appliances and socks to designer handbags. As a result, the media may love talking about Amazon and its growth prospects, even though the much quieter Macy’s may prove to be a better investment.
That’s the message that fund managers seem to be delivering, based on what stocks they appear most likely to buy or to shun over the next 90 days. True, Macy’s (M.N) shares have more than doubled the return on the S&P 500 index this year, while those of Amazon (AMZN.O) have lagged that index year-to-date. StarMine’s Smart Holdings model, together with other fundamental and technical indicators, seems to be signaling that owning more Macy’s and less Amazon is still the way to go. For Amazon to find solid technical ground and appeal to buyers on that level, its stock may need to fall another 18%, the data suggests.
Macy’s scores a strong 90 out of a possible 100 on the Thomson Reuters StarMine Smart Holdings Model (SH), indicating that there is a high probability that fund managers are looking to accumulate shares of the iconic retailer. That’s because Macy’s has more of the characteristics these fund managers currently favor, and so it’s more likely to pop up on a lot of their new-idea generation screens. Amazon, by contrast, scores only 23, meaning that it’s unlikely that fund managers will be accumulating big positions in that stock over the next three months. (Read more about the Smart Holdings model here). One reason for this may be that managers are saturated with their Amazon holdings. But there also exists some hard evidence pointing to deeper problems with the stock, especially its valuation, when compared to Macy’s.
Some of those valuation comparisons between Macy’s and Amazon are highlighted in Table I, above. By anyone’s standards, Amazon is hardly a bargain: based on the 12-month SmartEstimate for earnings (historically proven more accurate than the mean estimate) we find its forward P/E ratio to be well over 100x. Meanwhile, Amazon scores a mere 1 out of 100 on the Price/Intrinsic Value ratio rank, while Macy’s rank of 76 out of 100 puts it at the high end of the list of attractive US stocks.
Other factors to consider include:
- StarMine calculates that Macy’s five-year compounded sell side EPS “SmartGrowth” estimate (adjusted for optimism bias) of 10.1% is 5 percentage points higher than the level at which the market currently prices the company’s shares, which is 5.1%. StarMine’s analyst-derived forecast for Amazon of 12.7% growth dwarfs the 40.4% “implied” number, based on the actions of investors who are pricing shares 28% above the compound annual earnings growth (CAGR) estimates of analysts. In other words, Amazon would have to grow earnings per share at a rate of 40% per year for the next 5 years just to justify today’s current price. That’s the very image of a high-expectations stock.
- The widely followed StarMine Analyst Revisions Model, which incorporates earnings and other factors spells out another contrast between the two stocks: Macy’s 92 rank acts as a potential tailwind to the stock, while Amazon’s rank of 9 serves more as a current headwind.
- Combining several StarMine factors such as intrinsic valuation, relative valuation and two different measures of momentum (price momentum and analyst estimate revisions) into the blended “Val-Mo” model, and Macy’s scores a near-perfect 99, while Amazon drags along with a score of only 3.
So what is it going to take for Amazon to become as attractive in the eyes of the nuts and bolts folks, the types who sport green eyeshades, as Macy’s is today? There are fundamental and technical answers to this question.
Fundamentally, Amazon needs to close the gap between its five-year analyst earnings growth forecast EPS of 12.7% and the market’s implied growth rate in earnings of 40.4%. Investors remains overly enthusiastic about the stock, particularly given that only 5% of U.S. companies with long-term market implied growth rates of more than 29% have been able to sustain that growth, historically. That number shrinks to 1% when you examined large companies. (For more on this, see the following article: Lakonishok, et al, “The Level and Persistence of Growth Rates,” The Journal of Finance, VOL LVIII, NO.2 April, 2003.) Compare Amazon’s growth figures to Apple (AAPL.O), which has a five-year earnings growth rate that analysts forecast to be 17.0%, while its stock price implies a growth rate of 14.2%. Apple, like Amazon, is a sexy stock, but investor expectations are more tempered, as reflected in the earnings growth expectations that have are priced into its stock price.
If you examine Amazon from a technical standpoint, its long period of outperforming the Consumer Discretionary sector peaked October 17, 2011, just before Amazon announced its big earnings miss on October 25, when it reported net income of only 14 cents a share versus analyst expectations of 24.4 cents. The weekly price chart for Amazon is leaning toward a drop toward two prior peaks that will now form support for the share price at around $150. That’s nearly a 50% retracement of the gains Amazon made between its July 2010 low of $106 a share and its high of around $246 in October 2011.
We’d expect a share price of about $150 would be about the level where the stock might see a bounce and where you can re-examine the fundamentals — but that’s another18% or so below the recent $182 price.
Learn more about how StarMine analytics can help you pinpoint critical developments in your portfolio or watch list. Request a free trial today.