Amazon Is Headed Higher Into 2021, So Buy Every Dip

Advertisement

There are dozens of reasons why not to own stocks for the rest of the year. The macroeconomic reports are not showing great improvements. In addition, there is global turmoil from squabbles especially between the United States and China. Experts expect a contested outcome in the presidential election, so in all likelihood the danger will linger past the election date. Regardless, Amazon (NASDAQ:AMZN) stock is the right investment.

2 Billionaires who Could Push Jeff Bezos Out of Top Spot 
Source: alexfan32 / Shutterstock.com

In spite of these risks, AMZN stock should rally into the new year.

What has not changed this year is the fact that the U.S. consumer is spending in full force. We have seen record sales of recreational vehicles which is the ultimate statement of excess. The rhetoric is very bearish, but the spending on Main Street says otherwise.

At the heart of the thesis today is that we will have a strong holiday season. This will be especially true for the largest online retailer. Also Amazon’s advantage should carry over to its shipping arm much like FedEx (NASDAQ:FDX) and United Parcel Service (NYSE:UPS). The transportation sector is the beneficiary of that trend, albeit they will face operational challenges.

AMZN Stock Is Still Too Cheap

Being too busy is the kind of problem that businesses want. At one point investors sold Starbucks (NASDAQ:SBUX) stock for that reason and it turned out to be a buying opportunity.

Fundamentally Amazon has done everything right. Its critics disagreed with its thin margins for a decade before they finally figured out that this thing’s a beast. Under the leadership of Jeff Bezos, expenses went to the right line items. They are now an aggregator of many businesses that are very profitable. The exciting part is that Amazon is continuously finding new ones.

In spite of this, there is very little hope built into its current stock price. On the face of it, it seems expensive with a price-earnings ratio of 110x. But considering that its price-sales is only 4.9x, there is much more to go.

This is 20x cheaper than Zoom (NASDAQ:ZM) and 10x cheaper than Shopify (NYSE:SHOP). These two are more exciting because they are newer, but the original mega e-tailer still grows 30% a year.

Early August I wrote about how experts don’t realize how cheap AMZN stock was. It then rallied 14% and set a new record. The recent correction brings price back to that level for a rinse and repeat trading opportunity.

The Chart Setup Confirms that the Bulls Are Winning

Amazon (AMZN) Stock Showing Support
Source: Charts by TradingView

The charts suggest that the buyers have been in charge for years. Technically and for the short term, AMZN stock is poised to move in either direction. The 20% correction in September makes it so that the upside is more likely. The bulls immediately bought the dip up 10%, so they are still eager.

There are at least two levels of support through $2,600 per share. If they fail, there is a backup zone into $2,500 per share. This is good footing for the buyers to chip away at the resistance that exists into $3,400 per share.

There is a real chance that Amazon will set a new high in the first quarter of 2021. To capture this, investors should own the shares even up here. This is a trade that is worthy of turning into an investment. I have little doubt that if the stock market is higher in the future than so is AMZN. Therefore, any stint of weakness is merely temporary and an opportunity to add stock.

Leave Room for Error

Alternatively to owning equity, the options market provides more conservative ways of trading this opportunity. Investors can sell the December $2,200 put and collect almost $20 per contract. This trade does not need a rally to win. In fact, AMZN stock can fall 30% from current price before the investor would lose any money.

Those who do not want to own stock can sell a put spread instead. This still provides an opportunity that has an 85% chance of success yet can deliver 15% yield on risk.

Regardless of the method, Amazon stock is never a short, therefore by default own it for the long term. Because of extrinsic factors, things could get tricky for the next few months and for no fault of its own. Eventually the bulls will prevail!

Political risks do not change the fundamentals of this company. Fears that stem from the elections or from the economic wars between world leaders only sway sentiment. This is a temporary phenomenon that does not affect the bottom line.

On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Nicolas Chahine is the managing director of SellSpreads.com.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2020/09/amazon-amzn-stock-is-headed-higher-into-2021-so-buy-every-dip/.

©2024 InvestorPlace Media, LLC