Amazon

Some weeks ago I described the characteristics I look for in a stock's financials.  The short version is that I look for positive net income and more cash than debt, but here's a link to the original column in case you want the long version.

I also have written about my love of stocks that pay dividends, but this is not a dealbreaker.  A stock that doesn't pay dividends can still be an excellent investment, if the timing is right.

Thus far, all of these writings have been framed within an overall narrative in which I have detailed what I currently own and why.  I've even discussed, for a few stocks, the price at which I made a purchase and the price at which I am willing to make a sale.

This week I'm discussing the first of many stocks that I don't own, but I am considering for future purchase:  Amazon (AMZN).  Amazon is very nearly my dream stock.  The company consistently produces a very healthy net income, and has literally billions of dollars in cash while also having exactly no debt.  It's the industry leader in internet shopping, and is expanding into areas in which it's competing quite healthily with Netflix and Apple.  The only thing that Amazon could do further to entice me into buying stock would be to pay a dividend.  That said, I'll probably buy some shares whether the company pays a dividend or not.

What's the price at which I'm willing to buy?  I'm a firm believer in The Third Rule of Acquisition and so the first question I ask myself is, "What is the smallest price I could possibly be expected to pay for a share of Amazon stock?"  It's a simple question, but there's not a simple way to arrive at an answer.  Or, at least, there's not a single, simple way that I consistently use.  There are a number of competing simple ways that I use in conjunction with each other.

I'll start with a summary page for Amazon.  Any summary page will do.  Here's a screen-grab from the Google Finance summary page for the AMZN ticker, with the graph conveniently set to 5 years.

Any stock summary page will do because any stock summary page will list the 52-week range for that stock.  In this image I can see that, as of this writing, the 52-week range for Amazon was from a low of $160.59 to a high of $246.71.

Also, as I look at the graph, I can see that Amazon's 52-week high of $246.71 is also its 5-year high.  In fact, $246.71 is Amazon's lifetime high, but I have had to go find Amazon's lifetime graph to verify that this is the case.

All of this is just to get me thinking about the stock.  I've not yet arrived at the price at which I want to purchase some Amazon stock, but I have arrived at a somewhat conservative price at which I would like to sell:  $246.71.

This is not my pipe-dream I-can-retire-now price.  It's a conservative the-stock-has-recently-seen-this-price-and-so-it-will-probably-see-it-again-in-the-near-future price.  In fact, it's probably too conservative, so I'm going to set my completely-theoretical sell price at a nice, round $250.

See, when I look at that 5-year graph for Amazon's stock, I see a little slump back in 2008.  That little slump is what the rest of the world calls The Beginning Of The Financial Crisis.

Here's a Yahoo Finance graph of Amazon for the same five years, except it also includes comparison graphs for the Nasdaq, S&P500, and Dow Jones indices.  Yahoo chooses to use a graph with an inconsistent vertical scale, which I normally abhor, but in this case it actually allows me to better interpret the comparisons.  The same comparisons on Google's consistently-scaled 5-yr Amazon graph are rendered as a very-nearly a flat line at the bottom that really doesn't tell me much.

What I'm trying to say, in words and images, is that Amazon has consistently done well over time, even and especially accounting for The Financial Crisis and The New Normal.  Looking at these graphs, I'm tempted to assume that Amazon's stock price will continue in its trend of rising steadily upward for the foreseeable future.  That makes its lifetime high of nearly $250 an especially conservative price at which to sell.

Before I get too optimistic about Amazon stock, though, I'm going to look a little more closely at the recent fluctuations in price.  In this case, a 6-month graph tells me what I want to know.

The stock has been in a relative slump during the last four months, especially, but it seems to be coming out of it now.  The nadir of that slump was at the price of $173.10.  That's a bit higher than Amazon's 52-week low of $160.59.

Incidentally, the stock has probably been slumping because investors know that Amazon is selling the Kindle Fire at a loss of $10 per unit.  Amazon sold 4-5 million units during the holiday season, so that's a loss of up to $50,000,000.00.  That's serious money.

It looks like the informed speculation that the Kindle Fire was probably being sold at a loss appears to have hit in late September of 2011.  The same news appears to have been confirmed in mid-November.  That explains a lot of what I'm seeing in the 6-month graph.  It looks like some investors think that selling the Kindle Fire at a loss might not be the best idea ever.

Of course, other investors disagree, which is why the stock hasn't completely plummeted.  One investor's time to get out may be another investor's time to get in.

Personally, I'm bullish on Amazon, but not so bullish that I want to buy this very second.  I want to get the stock at the lowest price I can.  Having seen a minor freakout on the part of investors in the past few months, it seems reasonable to set my purchase price at $175.

If I can buy at $175 and then sell at $250 then that's a healthy 42% profit.  Right now the stock is at $195, though.  If I buy at $195 and then sell at $250 then that's only a 28% profit.  Of course, 28% is still pretty awesome.

This whole discussion is moot just now, though, because I have no liquid capital to invest in Amazon.  Also, I expect to make more than 28% on my current investments, so there seems to be no need to liquidate them just now.

Of course, my Netflix stock has been doing surprisingly well.  I was beginning to doubt that investment, in fact, but for now I think I'll let it ride.

That said, if Amazon were suddenly to fall back down to $175 then I'd do some quick math on how much more profit I think I could optimistically wring out of Netflix versus the 42% I think I could conservatively get from Amazon.  In that circumstance, I'm guessing Amazon would come out on top.

What if I'm wrong to be bullish?  What if selling the Kindle Fire at a loss is the first step to financial ruin for Amazon?  More likely, what if the ongoing financial crises in Europe affect markets in such a way as to depress prices on nearly all stocks, Amazon included?

I currently track Amazon and a couple of other companies - Google and Apple - that I'd like to buy in the event of another serious financial downturn.  When the financial crisis hit in 2008, Amazon fell from what had been its lifetime high of nearly $100 a share to below $40 a share, briefly.  That's an easily-calculated 60% drop.

If so, then it stands to reason that another crisis could drive the price of Amazon down 60% from its high $246.71.  That would price the stock at under $100 a share.

If that ever happens, I'm buying.  At the very second it crosses $100, in fact.  I'll liquidate something to do it.  I'll find a way.

I remember when Amazon went down to $40 in 2008.  I remember thinking that it looked like a good time to buy, but amidst the ongoing market plunge I thought maybe it hadn't hit bottom yet.

But then Amazon started rising while the rest of the market kept falling.  I kept watching Amazon, waiting for it to drop down to $40 again.  I had resolved to buy at $40.  Or $45.  Or maybe $50.  Everything else continued to tank.  Surely Amazon would drop down to $50 again long enough for me to buy a few shares?

Not so much.  It turns out Amazon is a company from which people will buy during a downturn, seeing as how Amazon discounts their merchandise so heavily.

As a result, Amazon not only survived the downturn, but thrived within it.  Now Amazon is in the business of putting everyone else out of business.

So yes, I'm going to buy some Amazon stock someday, when the timing is right.  If Amazon ever falls to $175 then I'll probably buy then, and if there's some kind of crisis and it falls to $100 then I'll hold onto whatever shares I bought on its way down and then buy more if I possibly can.

Because, ultimately, I think that $250 is way too conservative a price at which to sell Amazon stock.