Sometimes I get a few comments about “missing out” on the big run-up in stocks like Amazon.com, Inc. (NASDAQ:AMZN). Does it bother me that I’m not long? Does it bother me that AMZN stock seems to defy conventional wisdom, that this time it really is different?
Sure, it bothers me. It bothers me as much as not buying Apple Inc. (NASDAQ:AAPL) at $1 per share. But I don’t spend my time obsessing over missed opportunities that also carry tons of risk. A long-term diversified portfolio means that slow and steady wins the race, because risk must be managed.
Does this mean, however, that it is too late to buy AMZN stock, even as it sits near all-time highs? It depends on your risk profile, and your goals. So under what circumstances might I go long Amazon stock at these prices?
Three Scenarios for AMZN Stock
As a long-term diversified investor. The market has now told us, for over twenty years, that valuing Amazon stock is not going to work under traditional valuation methods. It is trading on some multiple of some metric that I don’t think anyone has examined too closely yet.
What we learned a few weeks ago is that AMZN stock is cheap based on a few factors: EV/EBITDA, based on other “highly valued” stocks, return on equity and revenue growth.
If you were to allocate a small part of a diversified portfolio to AMZN stock, with the intent to hold for 20 years or longer, I think Amazon stock might outperform the market during that period. However, given its $347 billion market cap, I would not expect much more than that, and possibly less.
As a trader. For more than two decades, people have said Amazon stock is overpriced, so why can’t it stay that way? It can, and if you are a trader, then you could take advantage of it. For example, several months ago, I did go long a little bit of AMZN stock at about $400 per share and rode it up to $500. However, I set a trailing stop loss of 8% on the stock, so that if it fell more than 8%, an automatic sell order was triggered.
I could see going long AMZN stock here, setting a tight stop loss at 6% to 8% below the current price. Whether I’d make that a trailing stop loss or not might depend on how I felt about losing all or some of my gains.
As an options play. A less-risky method, in terms of potential capital loss, is to buy call options. For example, suppose you were willing to buy 10 shares of Amazon stock at Wednesday’s closing price of $737.66, for $7,376. Your maximum loss would be that amount.
For roughly the same price, you could buy one November 19, $715 call option. That gives you the right to buy 100 shares of AMZN stock at $715 any time between now and Nov. 19. Of course, you are paying a lot for that privilege, to the point that if Amazon stock is not above $790 by then, you will break-even or lose money on that trade.
Alternatively, you could spend a bit more and buy a deeper in-the-money call option, so that Amazon doesn’t have to go so far up for you to make money, but you risk more capital.
As of this writing, Lawrence Meyers owns shares of AAPL.