We recently shared Horizon Kinetics Q1 2019 Market Commentary, a copy of which you can track down here. In the report, the fund shared its views on some of the companies from its equity portfolio. Among these, Amazon.com, Inc. (NASDAQ:AMZN) found its place as well. Here is the full comment on Amazon from the report:
“Assuming that the consensus earnings estimate by research analysts who follow Amazon proves to be accurate, then in order to profit from holding Amazon until the year 2022, the shares must trade at a P/E ratio greater than 21.45x in that year. To clarify, if the estimate of $82.26 per share is actually achieved in 2022, and if the shares trade at 21.45x that number, then it would be the same price as today.
The only way Amazon is going to appreciate, accepting the earnings estimate, would be if the valuation multiple were greater than 21.45x . Of course, the estimate itself assumes that Amazon’s profit will slightly more than triple in 36 months.
No one forecasts that the revenue will triple. Sales expanded at a 29.6% annual rate over the course of the past 36 months, inclusive of the Whole Foods acquisition. That was a double. Most analysts seem to project a 20% revenue growth rate. If accurate, Amazon’s 2018 sales of $232.887 billion will rise to $402.42 billion in 2022. Incorporating that information, then from a purely arithmetical perspective, the only way that Amazon could triple its reported profit would be to expand its profit margins. This is another way of saying that Amazon will increase prices, because it is already a very efficient company in terms of operations.
In any case, Amazon has about 500 million fully diluted shares. If it were to actually earn $82.26 per share in 2022, that would be $41.13 billion of net income, assuming, as this calculation does, that no additional shares are issued to its employees over the course of the next three years. That is probably a bad assumption; the current share count is 5% higher than three years ago.
Nevertheless, by this reasoning, Amazon will produce a net profit margin of 10.22% as opposed to the current margin of 4.34%. Even if the company manages to do all this, the share price would not advance unless the shares trade, in 2022, at a P/E ratio above 21.45x.
If, instead, the P/E ratio is 25x, and Amazon achieves all of this margin expansion and all this profit growth, the return to shareholders would be 5.23% per annum. Again, this makes the unlikely assumption that the company issues no more shares. It does seem like a great deal of risk for a rather unexciting rate of return.”
Ken Wolter / Shutterstock.com
Amazon the world’s biggest e-commerce and cloud computing platform as per its revenue and market capitalization, which currently stands at around $935.37 billion. The company is trading at a price-to-earnings ratio of 79.31. Year-to-date, its stock gained 23.43% having a closing price on May 9th of $1899.87.
At Q4’s end, a total of 168 of the hedge funds tracked by Insider Monkey were long this stock, a change of 12% from the previous quarter. By comparison, 130 hedge funds held shares or bullish call options in AMZN a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).
The largest stake in Amazon.com, Inc. (NASDAQ:AMZN) was held by Citadel Investment Group, which reported holding $5393.1 million worth of stock at the end of September. It was followed by Fisher Asset Management with a $2434.4 million position. Other investors bullish on the company included Eagle Capital Management, Tiger Global Management LLC, and Lone Pine Capital.
In this piece, we will take a look at ten recent IPOs in micro cap stocks.
There are a variety of benefits and drawbacks to listing a firm’s equity for trading on the stock market. The single biggest benefit of the process called an IPO, is that it allows management to raise large amounts of funds and investors to potentially profit by seeing their existing stakes multiply in value. At the same time, the IPO process also brings in a variety of constraints. Publicly listed companies are subject to corporate financial reporting requirements of the jurisdictions in which their shares trade. At the same time, share prices can be a volatile affair, and while investors stand to gain significantly if their companies are well received by the market, they also risk equally massive losses should the opposite occur.
Warren Buffett never mentions this but he is one of the first hedge fund managers who unlocked the secrets of successful stock market investing. He launched his hedge fund in 1956 with $105,100 in seed capital. Back then they weren’t called hedge funds, they were called “partnerships”. Warren Buffett took 25% of all returns in excess of 6 percent.
For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
As you can guess, Warren Buffett’s #1 wealth building strategy is to generate high returns in the 20% to 30% range.
We see several investors trying to strike it rich in options market by risking their entire savings. You can get rich by returning 20% per year and compounding that for several years. Warren Buffett has been investing and compounding for at least 65 years.
So, how did Warren Buffett manage to generate high returns and beat the market?
In a free sample issue of our monthly newsletter we analyzed Warren Buffett’s stock picks covering the 1999-2017 period and identified the best performing stocks in Warren Buffett’s portfolio. This is basically a recipe to generate better returns than Warren Buffett is achieving himself.
You can enter your email below to get our FREE report. In the same report you can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12-24 months. We initially share this idea in October 2018 and the stock already returned more than 150%. We still like this investment.
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