Schaeffer's Trading Floor Blog

Weekly Contrarian: Why Amazon Could Be Poised for Additional Upside

AMZN remains surrounded by skepticism, despite its technical tenacity

by 1/10/2013 12:16 PM
Stocks quoted in this article:

In a recent article on TheStreet.com entitled Amazon's P/E of 3,000: The Ultimate Buy Signal, the writer speculates that Amazon.com, Inc.'s (NASDAQ:AMZN - 264.01) astronomical price-to-earnings ratio should hint at a struggling stock that Wall Street should be wary of. However, the company keeps defying logic. "Margins squeeze, AMZN moves up. The company reports a loss, AMZN hits new highs."

This irrationality has the author questioning whether these metrics really matter to shareholders anymore. It's a query that's supported by AMZN's CEO Jeff Bezos, who claims it's a company's cash flow that investors should be focusing on. It's a hard system to fault, given AMZN's trek up the charts. "This is not only a great company, it's a great stock led by a superb management team," concludes the writer.

Takeaway

AMZN has certainly been defiant on the charts. In addition to outperforming the broader S&P 500 Index (SPX) by more than 11 percentage points during the past two months, the stock is sporting a year-over-year gain of roughly 48%. In fact, the equity recently took a solid bounce off its 60-day moving average, and, as a result, found its way to a record peak of $269.73 on Jan. 7.

Despite these technical triumphs, sentiment surrounding the stock suggests a glut of skeptics still remain. In the options pits, traders at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) have been vigorously placing bearish bets in recent weeks. The stock's 10-day put/call volume ratio of 1.34 ranks higher than 96% of other such readings taken over the last 52 weeks, suggesting puts have been bought to open over calls with more rapidity just 4% of the time within the past year.

This recent trend is echoed by the stock's bearishly skewed Schaeffer's put/call open interest ratio (SOIR) of 1.43. Not only does this show that put open interest outweighs call open interest among options expiring in three months or less, but it ranks in the 89th percentile of its annual range. In other words, short-term speculators are more put-heavy than usual toward AMZN.

The disbelief has not confined itself to the options pits. Among covering analysts, eight out of 29 maintain middling "hold" recommendations for the outperforming equity. Additionally, the stock's consensus 12-month price target of $282.90 is a slim 7% premium to AMZN's current perch.

Such low expectations surrounding a high-performing stock could have bullish implications. AMZN may benefit from some contrarian tailwinds in the near term, should any of these remaining disbelievers follow in the footsteps of Benchmark and Bank of America-Merrill Lynch, which raised expectations for the stock on Wednesday.


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