Too Much Tuesday? Amazon Shows the Sky May Actually be the Limit

Down 10%?

That's right, Amazon (AMZN) is down about 10% from that big post-market spike it took to 3,650 on 4/29 on the release of their earnings.  Despite earning $27Bn in the past 12 months (through 3/31) it's hard to rationally support a market cap of $1.85Tn at 3,600 as that's 68 times those earnings and those earnings came in a year which was perfecft for Amazon, with everyone staying home (with Government checks) and ordering on-line for an entire year.  In all likelihood, this may simply be as good as it gets for AMZN.

Expectations for 2021 are for another $27Bn to be put in the books at AMZN but I'm betting they miss those targets as people begin going outside again in the second half of the year.  Whatever the case, it's all about trade-offs and sales at AMZN's Whole Foods were off 16% last year – despite the fact that people still eat food.   In fact, had not Prime Moved up to a record 200M Members in 2020 – AMZN would not have had an earnings beat at all as Prime Revenues are now $25.2Bn, accounting for almost 100% of the company's profits (much like Costco).  

Like Tesla (TSLA) trading Bitcoins, it should bother you when the company you invest in doesn't actually make money doing the thing they're supposed to be doing – like selling cars or selling merchandise.  Bezos and Musk have the same problem as neither one of their core businesses is inherently profitable that way Microsoft is with software or Google and Facebook are with selling search ads.  Investors tend to treat them all the same and that's why you have these insane P/E ratios for AMZN (68x) and TSLA (686x) but more normal ones for MSFT (34x), FB (27x) or GOOGL (31x).  Investors are trying to put the square pegs on the round holes…

Part of it is from lazy, poor valuation models that tend to treat all stocks in a sector like they are the same and that's very much in line with the very poor quality of analysts these days.   Most people get their market analyst for free these days and that advice tends to come from bloggers who have no particular qualifications whatsoever but even the "professional" analysts generally suck – even the ones that don't have an agenda to steer the sheeple into whatever their Bankster Masters dictate needs to be bought or sold.

Yesterday, in our Live Member Chat Room, we re-picked our 2020 Stock of the Year, which was Barrick Gold (GOLD) as it was back below the $22 line, which gives them a market cap of $39Bn for a company that made $2.3Bn last year and should do about the same this year.  GOLD is a great hedge against inflation but there's a huge bonus to Barrick who sold 4.5M ounces of gold last year for about $1,050 ($4.7Bn) but also sold 450M pounds of copper at $2/pound for $900M.   

This year, Gold has been above $1,700 and Copper has been above $3.50 – so we will see substantial gains in revenues and certainly profits when they report earnings tomorrow.  That's why we jumped in and we were joined by plenty of others as the stock popped 5% yesterday.  Fortunately, in our Long-Term Portfolio (LTP), we added GOLD on the way down in January and February and have a substantial position with an aggressive $45,000 spread:

We actually collected a net credit of $4,750 (we rolled and doubled down on the original position) and, if all goes well, we end up with a profit of $49,750 (1,047%) if GOLD is over $27 in January of 2023 and already the net on the spread is $13,160 for a $17,910 (377%) gain on cash so far.  The short puts obligate us to buy 2,000 shares of ABX for $20 but we REALLY would like to own them at that price – so not much of a handicap there and the $4,750 gives as a $2+ discount to that price per share.

Yesterday's Trade Idea for our Members was:

We have them in the LTP but, as a new play, I'd go with:

• Sell 10 GOLD 2023 $23 puts at $4.60 ($4,600)
• Buy 20 GOLD 2023 $18 calls for $6 ($12,000)
• Sell 20 GOLD 2023 $25 calls for $2.85 ($5,700) 

That's net $1,700 on the $14,000 spread so $12,300 (723%) upside potential if GOLD is over $25 in 18 months.  Worst case is owning 1,000 shares at $24.70 – 10% higher than it is now.

Would you rather make 723% in 18 months buying a gold miner during an inflationary period with a looming copper shortage or chase after AMZN at 68 times earnings coming off a record-breaking year when people were forced to stay home and shop with money the Government sent them?  Which is more likely to work out in the next 18 months?  

That's it – that's how we find an investing premise and play it.  It's not complicated but you have to learn to tune out all the idiots and focus on some good, common-sense investing ideas that are based on sound fundamentals that YOU know are true.