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Trading Amazon Stock Should Be About Conviction, Not Emotion

AMZN’s meteoric rise makes for a grueling decision

In case you haven’t been paying attention, Amazon (NASDAQ:AMZN) stock is up 15% in 2020. That means the same share that cost you $1,898.01 on Jan. 2 is now worth $2,150.80 (as of this writing). The rise of a stock like Amazon along with the hyperbolic growth in Tesla (NASDAQ:TSLA) stock is raising fears of an equity bubble.

Trading Amazon Stock Should Be About Conviction, Not Emotion
Source: Ioan Panaite / Shutterstock.com

And the bad news for investors is that at some point, the market will go down. And it may go down quite a bit. But when will that be? I don’t know. As the saying goes, the market will go up until it doesn’t.

Buying Amazon at this level requires more conviction than guts. Likewise, selling Amazon at this level means having more conviction than your fear of missing out (FOMO). And to have that conviction means understanding why you own or want to own the stock in the first place.

It’s a Different World. It’s an Amazon World.

Sometimes I look at Amazon stock and say, “wow, just wow.” At times like these, I think there’s no way the stock can go up anymore. But that’s usually about the time I see another Prime truck make a delivery.

I ponder where the growth is coming from right when my daughter’s friend (who is 13 years old) mentions that she just bought something from Amazon in the same way we typically talk of buying things at the corner store.

But the examples I just listed only scrape the surface. Because those are just examples of how Amazon is dominating the e-commerce space. If you wanted to, you could make the case that even Amazon is benefiting from sustained consumer confidence due to the historic economic expansion. And if you were a skeptic, that could be your reason to sell AMZN stock (i.e. markets don’t go up forever).

Could the Company Be Broken Up?

You could also look at Amazon and see that it is in the crosshairs of regulators. On one level, that’s understandable. The company is growing in new directions almost every day.

However, it seems like whether it’s in artificial intelligence (AI, e.g. Alexa), Amazon Web Services (the cloud), or venturing into grocery delivery, the company continues to win and grow. Nevertheless, the prospect of the company being split into separate business units, no matter how unlikely, could be a valid reason for investors to sell.

Is a Dividend in AMZN’s Future?

I’ve written before about the idea that Amazon could opt to issue a dividend. To this point, CEO Jeff Bezos has been reluctant to do that. And why would he? As of the end of August 2019, Amazon’s operating cash flow was nearly $27 billion. But the company is using a substantial pile of that cash to pay down its debt from acquisitions (e.g. Whole Foods) as well as in the launch of Amazon Web Services.

However, there are two factors that are coming into play that may make the idea of a dividend more urgent. First, if the company keeps growing operating cash flow and net income (even at a lower rate), it won’t be long before investors might look at a stock price north of $2,000 and begin to ask for a dividend.

A dividend would also be an olive branch to the company’s detractors. Regulators would have a difficult time disagreeing with cold hard cash being sent to every shareholder of record. I’m not saying Amazon will do this, or even that they should. As I also wrote back in August, right now, the math doesn’t really work for a dividend:

Amazon has approximately 500 million shares outstanding. If they used every penny of their $13 billion free cash flow over the last 12 months, it would pay a dividend of about $26 per share. That 1.5% yield would not excite most investors.

Should You Buy or Sell Amazon Stock?

Investors who follow the trading principles of Warren Buffett will be familiar with these statements:

“For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments.”

“Buy a stock the way you would buy a house. Understand and like it such that you’d be content to own it in the absence of any market.”

Those statements seem to contradict each other, but maybe that’s the point. When it comes to buying or selling Amazon stock at its current levels, it’s all about where you see the stock in 2025 and beyond.

Once again, as much as I’d like to tell you there’s some sort of magic to this, there’s not. The stock will go up until it doesn’t. There’s no wrong answer: just your ability to live with your convictions.

As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/02/amazon-stock-is-a-conviction-play/.

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