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1 Reason To Avoid Amazon

Over the last couple months, I’ve shown you stocks to avoid…

Stocks to consider buying…

And some of the best stocks related to the coming Internet of Things…  Which you can find linked further below.

All these recommendations are to help you either avoid pain and terrible stocks.  Or to help you find potentially great stocks to invest in during this pandemic.

If you do both well, it helps you earn higher than average investment returns and build wealth.

Because the fewer investment losses you have the more capital you keep. And the more capital you keep the faster you compound your money.

Today, I want to show you 1 Reason To Avoid Amazon so you can continue building your wealth safely.

1 Reason To Avoid Amazon

It’s Enormously Overvalued

Normally in these articles I talk about profitability, cash flow, the affects coronavirus is having on a company’s financials, among other things.

But frankly none of those matter with Amazon (AMZN) due to its huge valuation.

Amazon is the world’s dominant retailer and seller of all things online.

In the last 10 years it grew revenue from $34.2 billion in 2010 to $321.8 billion in the last 12 months as it expanded its offerings and made things better, faster, and more convenient for customers worldwide.

I expect it to continue doing so during and after this pandemic because of its solid competitive advantages, convenient and fast delivery, business model, and profitability.

And these things bring an enormous amount of stability to its stock as an investment.

But stability, rapid growth, and world domination also lead to a problem…  People are buying its shares so much that its stock is enormously overvalued. 

Its current P/E is 119.

Its current P/CF is 30.6.

And its current forward P/E is 59.2.

I look to buy companies with valuations below 20 on all these metrics to consider the company undervalued or at worst fairly valued…

Amazon is well above this threshold.

Why below 20?

Because that means the company is at worst fairly valued… And if its significantly under 20 that means the company is undervalued.

When a stock is fairly valued or undervalued it gives you more margin of safety in investing terms.

This means you have a better chance of earning higher returns owning its stock over time.  And these things combined make the stock a less risky investment.

With Amazon being overvalued it means there is no margin of safety owning its stock… That you have a far lower likelihood of making money owning its stock over time.  And these make investing in its stock riskier.

None of this means I think Amazon stock will implode over time.  I don’t.

It will continue growing and dominating the world.

But just because I expect it to continue performing well doesn’t remove the risk of its high valuation… Especially with the massive amount of uncertainty we’re dealing with today.

I don’t recommend you buy any stock based on what’s expected in the future… I recommend you buy based on how the company is performing now.

Not hopes.

But isn’t Amazon always overvalued and its stock keeps rising?

Yes… In the past.

I don’t buy something just because it goes up either… I need to have as much margin of safety when recommending an investment to you as possible.

Amazon must continue performing spectacularly to keep up with its overvaluation.

I don’t want to rely on continued spectacular results over extended periods when recommending any investment. Because at some point spectacular results won’t come… Even for Amazon.

For this reason of its huge valuation I recommend you stay away from investing in Amazon stock.

If you already own it keep holding.  But I don’t recommend buying it as a new shareholder now.

Use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times. 

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

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