Archive for April, 2012

Amazon’s (Symbol: AMZN) Stock is Overpriced

imageAmazon’s stock (Symbol: AMZN) shot up over $30 a share today after Q1 earnings came back better than expected. AMZN finished the day at $226.85, a price that is mind blowing to me.  I am a very heavy user of Amazon.com and I completely buy into everything as a consumer, but this stock now has a P/E of 186!

Amzn Stock 2012The concept of hypothetical growth is not lost on me, but any company that is pushing 200 P/E really does not seem like much of a discount to me. Especially a company that has been around as long as Amazon. This isn’t a young “whipper snapper” start-up, this is an established company. Even the EPS was to quadruple, it still wouldn’t seem to be much of a bargain. With pricing this high, the simply fact is that the market thinks Amazon is going to conquer the world. Amazon’s revenues are growing, but actual EPS still remains relatively weak.

Amazon Stock Overpriced

Although I sit here and tell you that I think the stock price insanely high, I wouldn’t be surprised if this stock continued to grow on hopes and dreams. When it comes to investing, no one wants to “miss the boat.” That is also why Facebook’s IPO will most likely be a success. It’s not about fundamentals, it’s about speculation and getting on the bandwagon.

Full disclosure, I bought a long Amazon option a while ago but ditched it after getting cold feet on how weak the stock is fundamentally.

Also if we really are buying this hypothetical magical growth potential, it would be reckless not to consider some of the macro factors that could drastically change Amazon. Let’s start by considering the sales tax loophole, that many of Amazon’s customers enjoy. that is likely to get closed or the fact that the actual business model is highly reproducible.

It’s one man’s opinion, but I don’t like AMZN long at anything above $200 a share until the P/E is at least less than 100. The scary part is that if Revenue and EPS does indeed grow, would the P/E even  go down due to even more market speculation?  I think one thing is almost for certain, AMZN will be a highly violate stock the next 2 to 5 years. It’s getting close to sink or swim time.

Why You Will Never Be A Millionaire Making $50k a Year

Are you the type of person who constantly strives toward becoming the next millionaire? You might think that with a frugal lifestyle and proper investing, you will obtain the status of self made millionaire excluding your retirement benefits. Sadly the truth might be, that if you are not making a lot of money, your odds of becoming an inflation adjusted millionaire aren’t very good.

An example would be an individual making $50,000 a year will probably have approximately 25% (or more) of their money going to health care and taxes, bringing their monthly take home to roughly $3,100. Depending on where you live and your lifestyle, there is a good chance that you will likely have at least a base level of expenses of roughly $1250 – $1750 (rent, food, phone, utilities, clothing, and etc.) Now of course there are exceptions to this such as living rent free with a relative, but in most scenarios, about half of your take home pay evaporates every month. If this person was a financial martyr and didn’t buy anything, take any vacations, drove an old car, etc., its reasonable to think they could scrap up $1,500 every single month.

Assuming 6.215% yearly growth, how much do you think this $1,500 a month would be in 10 years? If you said a million dollars, you are wrong. It’s a quarter of a million dollars unadjusted to inflation. Assuming 2.5% inflation, it’s only $195,299.  If you continue to save $1,500 a month for the next 20 years (30 years total), you would now have $1,706,600 unadjusted for inflation, but let’s not forget capital gains taxes. If taxes remain constant, you are looking at paying about $175,000 (or more) in taxes. After taxes and again assuming 2.5% inflation, this amount would only equal $730,183 after inflation.

Even though this individual saved $1,500 a month for 360 months, they would still not have an inflation adjusted million dollars in thirty years. Imagine where you are 30 years from now. It is possible that your income has increased, but most likely your responsibilities have as well (kids, housing, etc.). Can you imagine saving $1,500 a month on a $50,000 income? I make more than $50,000 a year and I only save approximately $400 a month.

So what is the point of this article? To offer perspective on becoming a millionaire by just being frugal. Most likely most people with careers will become millionaires when including retirement accounts, pensions, social security, etc., but the idea of becoming a self made millionaire by only living frugally might not be the best approach. The best way to become a millionaire is a combination of living frugal and increasing ones income whether that be through a promotion, side business, or a spouse working.

Straddling Best Buy Stock (Symbol: BBY)

Best Buy Stock 2012On Friday, I decided it was time to straddle Best Buy’s Stock (Symbol: BBY). For those of you who are not aware of what a straddle is, a straddle is taking a position both up and down. At first this might seem counter productive, but a well executed straddle can be very lucrative. Let me first tell you exactly what position I took and how I hope it will pan on.

I purchased two options:

BBY – Jan 19th, 2013 – $23 Call – Cost $2.38 each, Quantity 2
BBY – Jan 18th, 2014  – $20 Put – Cost $3.89 each, Quantity 3

The stock was trading for $22.43 at the time of purchase. Now the question quickly becomes, why in the world would you want to take Best Buy both ways? Because my gut feeling is that the stock is doomed, but It is possible for a “dead cat bounce” (unsupported upward movement before ultimately falling). This stock might be oversold believe it or not. Best Buy’s stock was trading for roughly $30 a share at the beginning of the year  and over $40 the year before that. Now when I say I think the stock might have a “dead cat bounce” in it, I’m not thinking its going to shoot up $10 a share, I’m thinking more like $3-6 (complete guess).

I should also disclose that my Call option is only for 9 months, while my Put option is for 1 year 9 months. It is a straddle, but it’s ultimately I’m more short than long. So how will I profit? Hopefully a visual ad of this will help. Below shows the two options and where they each become profitable along with their expiration dates.

Best Buy Stock 2012

I am hoping that the stock bounces up before the 2013 and ultimately tanks in 2014. A made a sense hypothetical result picture below. Now these numbers are just to illustrate a point. I have named the chart “perfect world result,” because the odds of this happen are very slim.

 

Best Buy Straddle

If the “Perfect World Result” happened, I would have purchased 200 shares for $23 and sold for them for $34 a share (profit of $2200, that’s if I liquidated the shares immediately, remember I own 2 options). I later would also have purchased 300 shares for $11 and immediately sold them for $20 a share (profit of $2700, I own 3 options). That would be $4,900 minus my cost $1254 + commissions (roughly $1300).  This would be a 276% return on my money.  Now the chances of this happen are very slim, but this example is just to illustrate how this straddle works.

Possible Other Results:

  • Stock goes to $11 a share by 2014. ——————-Result: +$1446,  115%  return.
  • Stock goes to $15 a share by 2014.——————Result: +$246, 19.6% return.
  • Stock goes to $35 a share by 2013. ——————Result: +$1146,  91.3% return.
  • Stock goes to $30 a share by 2013. ——————Result: +$146,  11.6% return.
  • Stock never leaves the $20 to $23———————Result: Options are worthless. 100% loss.
  • Stock finishes at $18 a share. –————————–Result:  $-654, 52.15% loss.

This story is simply best left to the hosting website: http://cainesarcade.com/. A 9 year old boy has inspired the imagination of millions and has raised about $150,000 for his college education in the process. That’s right, $150 grand. Your faith in humanity will most likely be restored with this story. Check out the website for the entire story.

Caine's Arcade

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