≈ When earnings play catch up≈
Amazon stock first hit $3,250 on July 13th, 2020. It was red-hot and had been ripping higher for months. Then, it ran out of gas. Shareholders have been stranded at $3,250 for nearly a year now. Sideways is the new up.
It can be frustrating when a glorious uptrend transitions into consolidation. Directional trades sour and cash flow plays become the only game in town. But there is a silver lining to the months of neutrality. It allows earnings to catch-up to price.
Fundamental analysts like to value a stock based on its price to earnings (P/E) ratio. If a stock is trading at $100 and has annual earnings per share (EPS) of $10, then we say it is trading with a P/E ratio of 10. In other words, it has a 10 multiple.
When Amazon zoomed to the moon last year, it outpaced its earnings growth considerably. As a result, the P/E ratio increased and signaled the stock was becoming more expensive from a valuation perspective. Its multiple was expanding. Do you know what’s happened in the year since the stock hit the snooze button? Earnings have increased. Here are the past four quarters’ EPS: $10.30, $12.37, $14.09, $15.79.
What happens when P goes sideways while E rises? The P/E ratio falls. Said another way, the multiple shrinks.
Amazon has been growing into its lofty price. That is perhaps the most important silver lining of sideways.
Chart of the Day
Amazon’s P/E Ratio
Though Amazon’s share price hasn’t budged, it’s actually a great deal cheaper than it once was. The reason? Earnings have exploded. The P/E ratio has shrunk dramatically from 106 to 59.
Video of the Day
Onboarding with Coach Frank
Every Monday night on the Tackle Trading YouTube Channel Coach Frank holds his weekly onboarding class where he highlight’s the products and services at Tackle Trading. If you are a new member or interested in what Tackle Trading is all about be sure to check out this week’s onboarding class!
Today’s line up
Traders Lounge 11 AM EST
Join the coaches in this live lounge, ask questions, discuss ideas or just sit back and listen to veteran traders discuss market conditions.
The Coaches Show 8:30 PM EST
This is our weekly MasterMind group. Join the coaches tonight, 8:30pm EST to discuss the markets and help you prepare for the week.
Halftime Report 12:30 PM EST
The Halftime Report starts at 12:30 EST and covers what news is driving the market, chart analysis from the movers and shakers of the day and fun in a way that only Matt and Tim can deliver.
Financial freedom is a journey
Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.
Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.
All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.