Amazon Added To Our Model Portfolio (Technical Analysis, Upgrade)

Summary:

• As you can see from our last article, Amazon.com, Inc. stock had our Sell Signal. Now it has our Buy Signal, and we can put it in our Model Portfolio.
• Amazon will stay in the Model Portfolio as long as it continues to outperform the Index.
• We also will automatically delete Amazon if it triggers our Sell Signal again.
• Amazon has not resolved all the challenges we pointed out in our last article, so we will continue to watch it closely.
• The market does not see a recession coming, but we do. A recession would likely impact Amazon negatively.

Amazon.com, Inc. (NASDAQ:AMZN) is having a nice bounce and has changed our proprietary Sell Signal to a Buy Signal, so we are upgrading it and adding it to our Model Portfolio. In our last article in October 2022, we had a Sell Signal and AMZN was dropping to test the bottom. Then the bottom fishers came in and took it up.

On the chart below, you can see AMZN hitting the bottom and then bouncing. At the top of the chart is our proprietary SID Buy Signal, and you can see that improving from a Sell Signal below the red line, to a Hold Signal and finally to a Buy Signal above the green line. AMZN will stay in our Model Portfolio as long as it continues to outperform the Index, even if our Buy Signal drops to a Hold Signal.

The technical buy signal indicated by the blue vertical line came much earlier. Our SID Buy Signal lags the technical signal because it uses both fundamentals and technicals. Our fundamentals have a bias against overvalued stocks, and it delays giving a Buy Signal to overvalued stocks, especially if price is not performing well.

Here is the weekly chart showing our proprietary Buy Signal at the top and the technical buy signal, much earlier, at the bottom.

Now we have to do our fundamental due diligence, and we use SA quant ratings to do just that. Here is what they are saying about AMZN.

AMZN has good grades for Growth, Profitability, Revisions and Momentum, but has a poor grade for Valuation. That makes our task so much easier. The only factor where we have to dig much deeper is to open the Seeking Alpha Valuation tab.

We already knew that Valuation was the problem, because our SID signal has a bias against overvalued stocks. When we see a technical buy signal on the chart, such as the blue vertical, buy signal line, and we don’t have our SID Buy Signal, it is usually because the stock is overvalued. This was always the problem with AMZN. That problem can be solved by growth and earnings revisions.

If we go to the SA Valuation tab, we will find the details of the valuation problem. The forward, non-GAAP, PE is 81 compared to the sector benchmark of only 14, so AMZN gets an “F” grade for that metric. To get past this short-term problem, long-term growth has to be really fantastic. Maybe it will be with AI. The market seems to think so, and that is why the bottom fishers came in at the bottom.

Let’s look at PEG because that involves long-term growth. The forward, non-GAAP, PEG gets a “D+” because it is so far off the sector benchmark of 1.34. AMZN comes in with a premium of 2.21. The market seems to think it deserves that premium. If you go down the list you will see all of the bad valuation grades for price to sales, cash flow, EBITDA, etc.

Another factor is the possibility of a recession. The market does not see one coming, so overvalued stocks are given a pass as long as the consumer keeps spending. The hot jobs market has enabled the consumer to have plenty of optimism and money to spend. If the Fed’s high interest rates ever bring about a recession, stocks like AMZN will likely drop.

Meanwhile, Amazon has our SID Buy Signal, and we will keep it in the portfolio as long as it outperforms the Index. From a timing point of view, AMZN is pulling back to retest support, and that will trigger our timing “buy on weakness” signal. The portfolio managers wait for that signal. The 46 analysts on Wall St. that have a Buy Rating on Amazon stock will likely encourage them to buy on weakness.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in AMZN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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