Buy Before the Holiday Season
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you are a trader, the holidays have an extra additive in which to speculate-holiday sales. Additionally, the holiday sales season is often looked at as a barometer of our nation's economic health and the state of the consumer. Needless to say, holiday sales have been under pressure the past few years as the U.S. continues on the path to economic recovery.
Unfortunately, the National Retail Federation's sales prediction for this year comes in lower than expected at 4.1%. The retail group cites uncertainties as the main hinderance to sales growth this year. With the fiscal cliff threatening to raise taxes on the whole country, it is understandable that consumers are generally going to be spending less than the last few years. Additionally, this is not something you want to hear if you are a retailer which the industry relies 40% of its annual revenue on the holiday sales season. This means names like Macy's (NYSE: M), Sears (NASDAQ: SHLD), Wal-Mart (NYSE: WMT) and Target (NYSE: TGT) could take a hit when reporting fourth quarter earnings. However, a research report by Forrester forecasts online retail sales to rise 15% this year, or $68.4 billion. Obviously, the edge here is being given to the online retailers who have been receiving higher growth forecasts than regular retailers over the past few years. This makes names like Amazon (NASDAQ: AMZN) more appealing to me than its rivals above.
The online retailer is anticipating this holiday season to come in at a record. CEO Jeff Bezos recently appeared on the Today Show saying "It will be a record season for us, knock on wood" (All Things D). If last year's 35% increase in revenue in the fourth quarter is any indicator for this year's season, Amazon could indeed see a very prosperous fourth quarter. To prepare for the expected busy holiday season, Amazon has announced they will be hiring 50,000 seasonal workers to meet demand. Before we go any further, lets take a look at the fundamentals and compare them to the fundamentals of Amazon's competitors listed above.
Amazon has a market cap of $102 billion and currently has a "hold" rating from analysts. The company has a ridiculous price to earnings of 3217 and a forward price to earnings of 128. The overvalued condition continues with a PEG of 90, price to book of 12.5 and price to free cash flow of 96. Additionally, the company has questionable financial stability with a quick ratio of 0.64. On the bright side, Amazon has no debt and earnings per share are expected to grow a whopping 17,800% next year and 36% the next five years. The stock is up 30% year to date. As you can see, this stock has some crazy valuations. Amazon has had a deeply overvalued stock for quite some time now and is more of normality now. However, it should be a cause for concern over the long term. I believe that if you are using Amazon to play the holiday season, the overvalued state is not of huge concern as long as we continue to see progress with the fiscal cliff talks.
Macy's, Sears, Wal-Mart and Target all have better fundamental standing, but these names are primarily brick-and-mortar based retail companies. Macy's has a PE of 12.74, compared to 13.97 for Target and 14.20 for Wal-Mart. Sears did not report a PE. This figures are close to the Department Store industry average PE of 17.20. Wal-Mart has been stepping up its online presence during the holiday season the past few years. Wal-Mart.com continues to attempt to put pressure on Amazon by offering good deals and cheap shipping.
Unfortunately for Wal-Mart, Amazon is widely considered to be the online retail hegemon. Furthermore, why would you buy something from Wal-Mart.com if you could go in store and save on shipping? Additionally, a recent study done by Bloomberg tried to see if Wal-Mart truly does offer the lowest prices, as they claim. The results from the study showed that Amazon beat Wal-Mart's pricing over half the time. The point I am trying to make is the fact that Amazon has an easier time against its online competitors than a retail giant has against other giant competitors. This means that, in theory, Amazon will be a victor of the holiday sales season and a victor for its shareholders.
To reiterate, there are some risks to owning Amazon. Primarily, there are a lot of uncertainties in the market right now. The fiscal cliff is only 43 days away as I write this and there is limited progress being made. Bears of Amazon have made the case that the stock could be a "fiscal cliff stock," meaning if we do go over the cliff, the stock could be hit very hard due to its overvalued state. Next, while consumer confidence is on the upswing right now, retail sales are not expected to be a blockbuster for retail locations. Will this trend hurt online retailers as well, despite the forecast for higher growth? If online sales come in under Amazon's estimates, the online retailer could be hit with a loss due to the increased hiring for the expected uptick in demand.
The bottom line here is that Amazon is looking poised to have a very solid holiday season. However, there are some uncertainties out there that you must keep an eye on if you enter this trade. As long as holiday sales meet or slightly beat expectations, the trade could be a winner. Amazon is currently in the best position to profit during this holiday season; there is no other way I would want to play it. Take a look at Amazon to determine if the retailer is right for your portfolio and risk appetite.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services recommend Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!