Amazon falls back but valuation still defies sense

At the end of last week, Amazon (AMZN) reported a 68% gain in first-quarter earnings. At one stage during trading on Thursday the company's shares moved over $150 and at their current $143, they still trade at 47 times forward earnings. For the first quarter of 2010, Amazon reported net income of $299 million, or 66 cents a share, compared with net income of $177 million, or 41 cents a share, for the same quarter in 2009 and compared with expectations of 61 cents. Revenue grew 46% to $7.13 billion, ahead of analyst expectations of $6.87 billion. Operating margins were 5.5% compared to 5% for the same period last year.

For the June quarter, Amazon said it expects net sales to come in between $6.1 billion and $6.7 billion. Analysts had been looking for $6.4 billion in sales for the period.

Though Amazon is the undoubted king of e-commerce, it still seems extraordinarily expensive on normal valuation grounds e.g. p/e, book value. Though most analysts remain positive on this stock, any wobble in its sales, earnings trajectory will leave it exposed to a big move down. I love the company, but I don't love this stock price.

Amazon and Microsoft boost sentiment a little in tech sector

The DOW Jones industrial average declined yet another 115 points to finish where it was in November at 10,120. The UK FTSE 100 finished down 71 at 5,145. Sentiment was not helped by poor results in the session from mobile phone chip maker Qualcomm (QCOM) which fell 15% as it cut its 2010 outlook and a muted response to Apple’s (AAPL) new tablet computer the Ipad, which after weeks of hype clearly didn’t live up to overheated expectations.

However, after the close last night Amazon and Microsoft both posted better than expected results. Online retailer Amazon.com (AMZN) shares rose 2.7% to $128.69, after an initial 8% decline as results came through. The company said its fourth-quarter earnings rose 70% to $384 million (85 cents a share) against expectations of $0.70 a a share, helped by strong holiday sales of electronics. Sales rose 42% to $9.52 billion against analyst forecasts of $9.04 billion.

The company also said its board has approved a plan to buy back up to $2 billion in shares which may signal that either the company is envisaging that future earnings growth may be harder to come by or they cannot find a better way to spend their cash reserves e.g. buying companies.

Shares of Microsoft (MSFT) fell 2% to close at $29.16 in after hours trade. Second quarter net income rose to $6.66 billion, or 74 cents a share, from $4.17 billion, or 47 cents a share, in the year-earlier period. Revenue rose 14% to $19.02 billion. The results included $1.7 billion in revenue deferred from prior quarters, related to pre-sales and a marketing program for Windows 7. Analysts expected earnings of 59 cents a share on $17.9 billion in revenue. 

At current levels of both the FTSE and DOW are starting to look attractive after being overbought in January. Technical traders of the S&P 500 are looking at 1050 as a support (it is currently 1085). After 6 months where it was easy to make money on the stock markets of the world, it is going to get a little tougher in the remainder of 2010. Choosing undervalued stocks is key rather than betting on broad sector plays such as emerging markets or commodities. For Contrarian Investor this is a much more interesting market to play with the volatility.

Update on portfolio 27th December 2009

Coal of Africa (CZA): Has risen to £1.00, following buy at 95p, as South African Coal prices for export continue to rise. News on Vele Mine approval still awaited with anticipation.

NightHawk Energy (HAWK): Bought at 35p. After slipping as low as 30p, has stabilised at 33p. News on Jolly Ranch lateral wells and waterflooding at Revere anticipated in early January. News flow should drive signficiant momentum in this stock. The recent takeover of XTO energy by Exxon shows the potential valuations of shale oil/gas plays. An exciting stock to hold for 2010.

Desire Petroleum (DES) and Falklands Oil and Gas (FOGL): Desire purchased at 85p, now at 86p and FOGL at 131p, now at 128p. The Ocean Guardian Rig has reached Las Parmas.

Next leg:
Las Palmas- Recife, Brazil: 2,860 nm @ av. 4.5 kn = 26 days = ETA Recife 19/20 Jan

Last leg:
Recife-FI 1st location: 2,470 nm @ av. 4.5 kn = 23 days = ETA FI [1st location] 12 Feb 2009
@ av. 5 kn = 21 days = ETA FI [1st location] 6 Feb 2009

Amazon (AMZN): Short set at $146. Now at $138. Short closed

Short Dollar/Euro: Euro shorted at 1.51. Short closed at 1.47. Now at 1.43.

Short emerging markets: Shorts placed on JP Morgan Emerging and Templeton Emerging. Both investment trusts have risen since the short. Given momentum in this sector, watching closely with a view to close.