Retailer Slump: Time to buy?
Today's Financial News - Posted February 24, 2009
Retail sales continue to slump right alongside consumer confidence. Even with a slowdown, Amazon (NASDAQ:AMZN) continues to show strength. How long can it last?
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): The general consensus on Wall Street is retailing is dead. Today’s figures from Home Depot (NYSE:HD) and Radio Shack (NYSE:RSH) are strong evidence, and so is the record-low reading in consumer sentiment.
But if companies are suffering from a huge drop in margins and a major slowdown in consumer spending, how is it a company like Amazon (NASDAQ:AMZN) is making it through this recession without a scratch? After all, its share price is up by more than 80% from its November lows.
The answer is fairly simple. First, the company has very little margin risk. Amazon is merely an outlet for retailers to sell their products. That means the company does not have to worry about slashing prices just to attract customers. It pushes the margin problems onto its suppliers.
In fact, with consumer pocketbooks tight and price competition extremely tense, Amazon is creating more demand for its unique selling environment. Consumers are using the company to find the absolute lowest prices on the goods they want or need.
The stingier the nation’s shoppers are, the higher the revenues Amazon will see.
Of course, this theory has its limits. Americans still have to spend in order for Amazon to make money. If the consumer-spending spigot slows any more, even Amazon will be out of luck.
Many investors may be tempted to grab shares of Amazon looking for its appreciation potential and relative safety. I warn against such logic. With a P/E ratio sitting at 43, this one is way overdone. Even a tiny earnings letdown will send prices falling.
Instead of buying Amazon at elevated prices, buy shares of beat-down companies like Radio Shack or Home Depot that have much more upside potential.
Next Article: The grasshopper needs a bailout
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