PAXS - Amazon: 100 Hated Stocks These 4 Worth Considering

2023-04-17 07:32:42 ET

Summary

• Amazon released its annual shareholder letter last week, and it gave the market multiple reasons to keep "hating" the stock.
• We review Amazon through the lens of its latest letter but first compare it to 100 other "hated" stocks (from 4 very diverse categories).
• After digging into the Amazon details (AWS, Advertising, AI, financials), we highlight one attractive stock from each of the four categories, and then conclude with our strong opinion on investing.

Amazon (AMZN) released its annual shareholder letter last week, and unsurprisingly the company's strategy continues to be "hated" by profit-seeking analysts (Amazon still thumbs its nose at short-term profits) and the market in general (the shares are still down big over the last two years). In this report, we review Amazon through the lens of its latest shareholder letter, giving careful consideration to its strategy (AWS, Advertising, Artificial Intelligence, innovation) and valuation. However, we first compare it to 100 other hated stocks (from four widely diverse categories), and then consider four specific ideas (one from each category) that investors may find particularly interesting. We conclude with our strong opinion about investing in Amazon (and the additional opportunities) in the current market environment (i.e. rising rates, high inflation, recession looming).

100 Hated Stocks:

If you like to purchase top businesses when their stocks are out of favor with the market, you may find the following list interesting. Specifically, we share data on 100 hated stocks divided into four very different groups: (1) Top Growth Stocks, Down Big; (2) Dividend Growth Stocks, On Sale; (3) Pandemic-Era IPOs, Now; (4) Big Yield CEFs, Discounted Prices. We then select (and review) one particularly attractive opportunity from each of the four groups. Let's start with top growth stocks (e.g. Amazon) that are still down big.

25 Top Growth Stocks, Down Big

"I told you so" is the phrase that comes to mind for many value investors as growth stocks have gotten absolutely slaughtered since the heights of the pandemic. Specifically, a lot of the high revenue growth stocks that soared the most in 2020-2021 have now fallen the hardest (as stimulus and lockdowns have ended, and the economy is left with the giant sucking sound of high inflation and increased interest rates). To give you a little perspective, the following table shows 25 high growth stocks (i.e. large caps with expected revenue growth rates of at least 8% this year and next) that are down big (i.e. "hated" by the market). Specifically, you can see just how bad performance has been by reviewing the 2-year total return column (i.e. lots of ugly red!). The table is sorted by market cap.

( TSLA ) ( META ) ( ADBE ) ( NFLX ) ( PDD ) ( ABNB ) ( JD ) ( UBER ) ( SHOP ) ( BIDU ) ( SNOW ) ( SQ ) ( CRWD ) ( PINS ) ( PAYC ) ( PLTR ) ( OKTA ) ( ZS ) ( MDB ) ( TWLO ) ( U )

There are a lot of other useful metrics in the above table too, such as current price-to-sales ratios as a percent of their 5-year range (i.e. almost all of these names are in the bottom 50% of their valuation range), as well as recent performance, short interest and more. We also find the "research margin" column very interesting considering a lot of these companies are spending a very high portion of their revenues on "research & development" in order to keep innovating and growing their businesses. And while it's tempting to dismiss all these stocks as losers (most of them aren't even profitable, as per the net margin column), a few of them are very attractive. We review one example below.

1. Amazon :

Amazon is our first (of four) hated stocks in this report, and it is hated for multiple reasons. For starters, the shares are still down over 40% over the last two years (see table above), while the S&P 500 is up. And another reason Amazon is hated is because after generating truly massive amounts of revenues in 2022, the company still wasn't able to generate a profit (see net margin column in the table above). Further still, Amazon is hated because it continues to thumb its nose at short-term profits, as explained again in its latest shareholder letter.

Amazon's latest shareholder letter:

Amazon released its annual shareholder letter last week, and a few big themes stand out. For starter, the company still doesn't care about short-term profits, as explained:

"We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions."

Another theme that stood out in the letter is that market conditions are challenging, as CEO Andy Jassy explained:

So, in closing, I'm optimistic that we'll emerge from this challenging macroeconomic time in a stronger position than when we entered it.

It is Amazon's focus on long-term leadership that has contributed to the long history of success for the shares, although it's been a very bumpy ride so far (particularly lately), as you can see in the chart below.

Amazon's Business:

Despite challenging macroeconomic conditions, Amazon's revenues have continued to grow (see chart below).

And for perspective, the majority of the company's revenue comes from people buying things through its website; however, Amazon has dramatically better margins (and much higher growth rates) in its Amazon Web Services business (AWS is the leader in cloud, ahead of even Microsoft ( MSFT ) and Google ( GOOGL )) and in its burgeoning advertising business (Amazon is only just beginning to use its massive user data to sell very lucrative advertisements). The growth in these two businesses (AWS and Advertising) were also important points in the annual letter:

"AWS has an $85B annualized revenue run rate [small compared to our total revenue chart above], is still early in its adoption curve, but at a juncture where it's critical to stay focused on what matters most to customers over the long-haul."

And regarding Advertising:

Similarly high potential, Amazon's Advertising business is uniquely effective for brands, which is part of why it continues to grow at a brisk clip... Advertising revenue has continued to grow rapidly (23% YoY in Q4 2022, 25% YoY overall for 2022 on a $31B revenue base)

Further still, Amazon was keen to mention advancements in Machine Learning and Artificial Intelligence in the letter:

"We're continuing to make large investments in machine learning to keep honing our advertising selection algorithms."

Big Tech companies have been rapidly touting their AI capabilities after Microsoft fired a shot across the bow regarding a $10 billion investment . And not to be left out, Amazon recently announced a:

"suite of tools, known as Bedrock , will give customers the ability to use foundation models - AI-based technologies built by "leading AI startups" - with their own data to create the model they need at that particular time, without having to invest in servers."

Amazon's AI strategy seems wise, and is also consistent with the company's large research margin (it spends ~14% of its massive revenues on Research & Development) which has helped the company maintain and grow long-term market leadership over time (remember, Amazon started out as simply an online book seller years ago).

Amazon's Valuation:

Valuing Amazon has been a tricky endeavor throughout its existence (one of the reasons some investors hate the stock) as traditional valuation metrics have consistently underestimated the company's ongoing growth and innovation. However, the shares are currently trading dramatically below their all time highs, and the company has shown some financial discipline recently laying off 27,000 employees (per the annual shareholder letter):

"We also reprioritized where to spend our resources, which ultimately led to the hard decision to eliminate 27,000 corporate roles. There are a number of other changes that we've made over the last several months to streamline our overall costs, and like most leadership teams, we'll continue to evaluate what we're seeing in our business and proceed adaptively."

And with the shares now trading at price-to-sales multiples significantly lower than historical averages (see below), some investors see value and upside.

Amazon Bottom Line:

Despite the steep share price declines over the last two years, we believe Amazon is well positioned to maintain and grow its market leadership position, especially considering the strong trajectory of AWS and Advertising, plus the company's willingness to invest in burgeoning opportunities (such as Machine Learning and Artificial Intelligence), and especially considering CEO Andy Jassy's recent spending discipline initiatives. In our view, the market will eventually recover, and Amazon is well positioned to benefit. We currently own shares of Amazon in our 38-stock Blue Harbinger Disciplined Growth Portfolio.

25 Dividend-Growth Stocks, On Sale

Switching gears to "dividend-growth" stocks, our next table shows 25 companies that have increased their dividend for at least 10 years in a row, but are still trading well below their 52-week highs (as per the "% of 52wk Price Range" column). Further, some of them are extremely attractive in terms of valuation. For example, you can see in the table below where each company's current price-to-earnings ratio sits relative to its 5-year range. Now obviously there is a lot more to valuing a company beyond simply share price movements and P/E ratios, but it can be a good starting point (for identifying companies worth further research) and there is a lot of additional data in the table too.

( JNJ ) ( HD ) ( PFE ) ( COST ) ( VZ ) ( QCOM ) ( AMGN ) ( UNP ) ( IBM ) ( MO ) ( ENB ) ( USB )

note: an extended and downloadable version of the above table (with data on over 70 dividend growth stocks) is available here .

And with the economy potentially heading into an ugly recession, a lot of investors sleep well at night owning companies with a track record of paying big growing dividends. And among dividend-growth stock leaders, the ones in the table above are down big (relative to their 52-week highs) and some present attractive contrarian opportunities, such as the one we describe below.

2. British American Tobacco ( BTI ), Yield: 7.9%

British American Tobacco is a UK-based company that sells tobacco and nicotine products to consumers worldwide. It trades in the US as an American Depositary Receipt ("ADR"), and its largest operating segment by geography is the United States. We recently wrote up BTI in detail in this report , but we're sharing a few highlights below.

For starters, BTI is very profitable, but it doesn't have huge long-term growth potential because the industry is viewed very negatively by many consumers and government regulators. Nonetheless, BTI has very high profit margins, high cash flows, a very well covered dividend, and a very wide moat (that gives it competitive advantages). Further, we view BTI as particularly compelling right now from a valuation standpoint. Specifically, the shares have significant upside from multiple expansion (i.e. the P/E should be higher).

If you are looking for a steady big-dividend grower, that also has share price appreciation potential, British American Tobacco is absolutely worth considering. We currently own shares in our Blue Harbinger High Income NOW Portfolio.

25 Top Pandemic-Era IPOs, Now

As if top growth stocks in general have not been hated enough, pandemic era Initial Public Offerings (i.e. a special breed of top growth stocks) have been absolutely abominable in terms of price performance. On one hand, if you are the company (or investment banker) that raised capital by issuing public shares when the market valuation was extremely high (i.e. during the pandemic bubble) then you did a good job (because if these companies IPO'd now-they'd raise a lot less money). But if you invested in these companies when they first became public, you are probably not happy at all.

The table below includes pandemic-era IPOs (we're using stocks with an IPO date of 2019 or later), and we required a revenue growth rate of at least 20% for this year and next (this is an extremely high growth rate, considerably higher than our earlier top growth stock table). And as you can see, performance has been absolutely terrible considering these stocks sit near the bottom of their 52-week price ranges.

( SNOW ) ( CRWD ) ( LI ) ( NET ) ( S ) ( GTLB ) ( DLO ) ( FROG ) ( AMPL ) ( SPY )

You'll note the table also includes a variety interesting metrics (such as short interest and price-to-sales valuation as compared to their 5-year range). You may also recognize many of the stocks in this table (considering they were extremely loved 1-2 year ago, but now extremely hated and out-of-favor with the market).

However, some of the names in the above list are actually very attractive businesses (especially after the steep price declines), such as the one we describe below.

3. Datadog ( DDOG )

Datadog went public in late 2019 (right before the pandemic hit) and it enjoyed an extraordinarily strong pandemic-era run as the price soared to over $190 per share. However, that has changed dramatically as the price now sits at only ~$67 per share.

For your information, Datadog is a performance monitoring and security platform for cloud applications, and it is benefiting from the massive ongoing secular trend of digitization and data migration to the cloud.

Specifically, it is a clear leader in "Application Performance Monitoring and Observability" as per Gartner's well-respected magic quadrant industry comparisons.

Datadog continues to generate rapid revenue growth (see our earlier 25-stock table) through its sticky SaaS business which benefits from high renewal rates and ongoing "land and expand" opportunities (especially as the digital revolution and migration to the cloud is still just getting started).

However, unlike other top growth pandemic IPOs, Datadog has not rebounded much this year because it recently offered lower-than-expected guidance (no big deal relative to the long-term trajectory of the business) and because it is not yet profitable (Datadog continues to spend extremely heavily on Research & Development-see earlier table for research margin-which is a good thing considering the opportunities ahead).

We previously wrote up Datadog in detail for our members at the end of last year, and we just recently added shares of Datadog to our Blue Harbinger Disciplined Growth Portfolio.

25 Big-Yield CEFs, Discounted Prices

A lot of investors indiscriminately hate closed-end funds (i.e. "CEFs") because they generally charge high fees. However, the fees can be worthwhile for some investors considering the unique nuances of CEFs (such as the potential for attractively discounted prices versus net asset values-a phenomenon that does not exist for ETFs and other mutual funds) and considering CEFs can deliver investment exposures that are difficult (if not impossible) for a lot of individual investors to achieve efficiently on their own (such as certain types of bonds, low cost borrowing and even various attractive private investments). Not to mention, CEFs can deliver the big distribution payments that many income-investors seek.

For perspective, the table below includes a list of select big-yield CEFs that currently trade at discounted prices versus NAV (as well as a variety of additional important metrics to consider). The table is sorted by strategy and then market cap.

( ADX ) ( UTF ) ( BIGZ ) ( RVT ) ( RMT ) ( THQ ) ( PEO ) ( PAXS ) ( BTZ ) ( DBL ) ( HYT )

The CEFs in the table above vary widely by strategy, but they all trade at significant discounts to NAV (see "Disc/ Prem" column). You may recognize a few of your favorites in the table, as well as a few popular omissions (such as PIMCO's many big-distribution CEFs which often trade at large price premiums to NAV, such as ( PDI ) ( PDO ) and ( PTY )). One CEF in the table that is particularly unique and attractive is Central Securities Corporation, as described below.

4. Central Securities ( CET ), Yield: 7.0%

Central Securities Corp. is an old-school closed-end fund (it was first organized on October 1, 1929) that offers an attractive 7.0% yield and trades at a compelling 17% discount to its net asset value. We recently wrote this one up in detail for our members (you can access that report here ), but we've included some of the important highlights below.

For starters, CET is not restricted as to the types of securities it owns (e.g., stocks, bonds), although it currently owns mostly stocks. And its largest position is a private insurance company, Plymouth Rock, at just over 22% of its net asset value.

Interestingly, Plymouth Rock is currently carried on CET's books at a massive discount to its expected market value, so CET's true NAV is even higher than being reported, and the discount to NAV is even bigger than being reported (especially considering the dramatic upside potential if the fund were to ever sell its stake in Plymouth Rock).

We also really appreciate CET's low-turnover (they're long-term investors) and prudently-concentrated strategy (they're not a closet index fund). Not to mention, CET has a very long and consistent track record of success versus the S&P 500.

Overall, we view CET as a uniquely attractive long-term investment.

The Bottom Line:

The market has been volatile, and there are a lot of investments that are currently hated for a variety of reasons. For example, Amazon is hated because the shares are still dramatically lower than 2 years ago, and because the company recently reported a net annual loss (despite its truly massive growing revenue).

And depending on your own individual goals, not all hated investments are bad (for example, we like and own shares of Amazon). In fact, depending on your own individual goals, we view each of the four specific opportunities in this report as attractive.

However, at the end of the day, you need to select investment opportunities that are right for you--based on your own individual situation. We believe disciplined, goal-focused, long-term investing will continue to be a winning strategy.

For further details see: