On CNBC, one institute estimated that Amazon will reach $1,250. Can I go for it?
- Referencing historical price movements of MSFT, INTC, CSCO, IBM, and WMT.
- The rewards are calculated in percentage, not in price.
- The high price itself is a risk.
- We do not recommend option to ordinary guys.
- How to find profitable stocks and build positions in a relatively safe manner.
Our objective has been to help ordinary investors improve their skills and returns, by exploiting the characteristics and trading principles of the price channel. It is not our intention to recommend any stock.
Low P/E, negative P/E, and high P/E, what do they have in common?
Maybe their stock prices are at the highest points.
- Low P/E: The current E (earnings) is high, but the future E is expected to be low. For instance, for cyclic stocks, the E is the highest when the economy is the strongest. Many retail investors were unaware of the consequence and buy at the peak of a cycle.
- Negative P/E: The dream stocks. The company is not making a profit yet, but future E is expected to be great. Many retail investors joined the dream chasing game. The most dangerous kind of stocks are those with one product, and the future is not entirely in the hands of the company. For instance, a company with just one drug pending approval.
- High P/E: Those just turning positive, or those at or near their peaks. They have amazing stories and/or glorious accomplishments. The mighty stocks.
Stocks of the third kind, the high P/E, would attract many investors. People tended to ignore any potential dangerous. They thought they were value investors. They forgot the advice from Peter Lynch “Buy the right stock at the wrong price at the wrong time and you’ll suffer great losses.” Sometimes it hurts you deeply and for a long time.
Let’s review some companies known to everyone, Microsoft, Cisco, Intel, IBM, and Wal-Mart. When they were at their peaks, few people would doubt the continuity of their dominance.
Let’s exam the charts around their previous peaks. All of them formed upward channels for a long period of time. The thing to pay special attention to is that, before reaching the vertex, the price soared again, breaking the long up-channel.
As we have discussed in “Topping patterns and Channel Trading”, the above condition is very often a sign of a top. When approaching a top, it is time to take profit and not to put in more money.
Now, Amazon. It closed at 891.51 at 2017/4/3. If it reaches 1,250, that is a 40% gain. It’s great to be able to find such a winner when the overall market is expensive.
However, notice the similarity of all those winners. After reaching the tops, some of them drop sharply back, some took 10, 15 years to regain the ground.
Is it rewarding to hold on to a stock for over 15 years just to get even?
Let’s look into the price movement of amazon. First, look at the monthly chart. It forms a beautiful up-channel. Beware, the price became stronger and broke the long-term up-channel upwards in 2016.
If we have a bird’s eye view, it is clear that since mid-2015, Amazon has gone beyond the longest channel.
That is really great! People began to talk about department stores, shopping malls, grocery stores, etc. will continue to be depleted and even forced to close. Amazon is going to dominate global e-commerce other than the China market. In addition, Amazon’s other businesses are fantastic, such as Amazon’s Web Services.
But, be cautious with your money. The glory of Amazon belongs to Amazon. Your own glory is, after assessing the bearable risk, the profits that can be obtained.
Is a gain of 40% worth the risk of holding a $1,250 stock?
100 shares of AMZN will be 125,000 US dollars, this is not affordable for most ordinary investors. From the point of position management, if you diversify your equity into 10 portions, you should have $ 1.25 million. Even if you only diversify into 5, you need to have 625,000. As for the suggestion that ordinary investors could play high-risk options, we think that’s irresponsible. If you want to buy AMZN, it should be for the dream, not for the short-term spread. If you can afford it, please stick to position management, and use channel trading to protect yourself.
How much room does AMZN have? Infinitive?
By the time AMZN reaches 1,250, its market cap will be about 605 billion. Second only to AAPL and less by 25%. The growth of a company with the size of Amazon is tied to the global economy, such as its growth in India. Just by eating up competitors is not enough to fill it up. In addition, to have a P/E comparable to AAPL, AMZN needs to increase the earnings per share by 14 times in the future.
Some analysts believe that the market value of AMZN will soon break through a trillion dollars. If so, its share price could appreciate 2.5 times, but its earnings per share must increase more than 30 times in order to achieve a reasonable P/E, unless the analysts will look at a 5 trillion market value then.
From the overall US stock market, our advice is to stay away from expensive stocks. Not just Amazon, but all expensive stocks, those with high prices and/or high P/E.
Even for MSFT, we think it is not cheap. The P/E is around 30. Look at the monthly chart, the price of MSFT is also above its long-term monthly up-channel. That means, expensive and risky. It’s risky simply because many people have gained a lot, and they are willing to cash out at the sign of danger. (66.19/14.87 = 4.45)
|Price||P/E||EPSttm||Market Cap ($B)|
From the simple table above, it seems, holding IBM, WMT, INTC, and CSCO are relatively safe. Whether to increase or develop a new position, you need to study their Earnings and Channels individually and carefully. For instance, Intel missed out on the mobile CPU market. How about the e-car and autopilot business?
For price movement, use Earning Channel to protect you. Follow channel trading principles. Don’t buy at or above the upper wall of a long-term up-channel. The stocks that make you money in a safer way and last for a longer time often do not go skyrocketing.
Please always remember the top two rules of Warren Buffet.
Rule No.1: Never lose money.
Rule No.2: Never forget rule No.1.
What we should look for are those that can bring us profits without high risk and within our own capability.
Instead of sticking to the mega companies, let’s try to find profitable stocks using Earning Channel.
First, we selected “typical channel” 60 days or 60 candlesticks.
It tells us that market sentiment in 2017/4/3 was on the bright side since there were more stocks forming 60-day up-channels than down-channels.
Then we selected the “strong uptrend” and “month”. Without setting other criteria, the system found 448 stocks satisfied this criterion: forming an up-channel with at least two peaks and two dips, and with 60 candlesticks or more. This tells us, the overall market has been strong for at least 5 years.
It is infeasible to browse through all 448 stocks, so we add more criteria. By adding EPS >= 0.5, P/E <= 25, minimum 5 year EPS growth rate >= -10%, and price <= 100, we quickly reduced the candidates from 448 to 17. Now we can browse these 17 stocks, and if we like their formation, we can study their fundamentals.
As we go through the monthly charts of these 17 stocks, we found most of them formed good looking channels. Some are near the upper walls of the long-term monthly up-channels, some are near the lower walls. After studying the Earnings (the fundamentals), you can trade according to channel trading.
If you are not familiar with channel trading, please refer to “The basics of Channel Trading”.
Among these 17 stocks, we found a few familiar names. One of them is EL (Estee Lauder). We saw that EL’s monthly channel was broken downward. It is climbing back. If the price bounces back inside the monthly channel, it may be a good time to buy. But, you should confirm with its fundamentals.
Earning Channel provides you convenient access to basic statistics. We can see that EL made 4.86 per share last year, and the P/E was 17.18. The revenue grew not much but steadily upward. The EPS fluctuated, but not too alarming. So, EL is a candidate for trading or investing. But you have better find out why the price dropped below the long-term monthly up-channel, and figure out if there is a long-term impact. It could be that some major investors just cash out prior to the election. The price grew 10X from 2009 to recent peak. (97.48/9.9 = 9.85)
Since the price of EL has gained 10X in the past 8 years, and the whole market is expensive, we recommend playing defensive.
Please always remember to use channel break-down and stop-loss to protect you. Do not trade until, the price is back inside the long-term monthly channel, and the daily chart has formed an up-channel. When we zoom into the daily chart, indeed it has formed an up channel. But the channel was just broken also. If it bounces back to the channel-buy-point, it may be a good time to trade.
In order to track the movement and to gain alert automatically, we put EL into the “action plan”.
First, we use the monthly channel as the guideline. It tells us, if the price is back to 94.70, you can consider buying. However, as the monthly channel is very narrow, you can gradually build up your position by using the daily channel.
When using the daily channel, the system will give you an alert to buy at 85.81 and to stop loss at 82.98. Please notice that all of the prices are for reference only. You can adjust all of the 6 channel trading lines using your finger.
Since the monthly channel-buy-point (94.70) is above the daily channel-break-up (90.48), when the price breakout the daily channel upward, it is not the time to take short-term profit. You can wait to see if the price goes up the monthly channel or back to the daily channel. If it is back to the daily channel, sell at channel-sell-point. Otherwise, hold on to it. In this manner, you will be able to build a long position when the stock price has already risen a lot, while preventing yourself from serious risk.
Again, our suggestion is to play defensive in the current market.
Amazon created innovative ways and means in growing its business. If you really care for AMZN, you have better practice the usage of the daily, weekly, and monthly channel for reasoning and setting. Earning Channel can alert you the optimal timing for a safer and more profitable trade. Please download Earning Channel and practice repeatedly.
Hope this discussion is useful to you.
Good luck on your investment.
We do not own any of the stocks mentioned in the article and have no intention of buying in the near future. Our purpose is to introduce methods and tools for improving ordinary investors’ skills and returns.
The Earning Channel software, as well as the articles, tutorials and suggestions in the website and social media, are provided as tools and references to help users develop their own market analyses and make their own investment decisions. Users are ultimately responsible for the way in which they use this information to invest in the stock market. Nothing associated with the Earning Channel or the information presented in articles and tutorials should be interpreted as direct advice on buying or selling of securities.