Amazon (AMZN) How High Can it Go?

There are times when stocks move to levels where common sense says there is no way it can justify the price. Amazon (Nasdaq: AMZN), the online retailer may be hitting those levels. The company has executed extremely well over the last 12 months when other retailers have struggled. I happen to like what they do and the strategy they have implemented very successfully. Fundamentally the stock is priced at levels were something will have to give in time. Either earnings have to rise or price has to fall. The P/E (price to earnings) ratio is over 57 for 2010 earnings. By any standards those numbers are high. Thus, I would be very cautious with the stock.

The chart below shows the rise of the stock over the last 12 months.  Support short term is $129.80 and then you see it is a little dicey from there. As an investor this is where having a plan before you own the stocks is key. Our target originally when entering the position was $100 per share. The price is well above that at this point. We use a simple strategy called stop management once we hit our target. The goal is to not give the gains back, but ride the move higher as long as possible. In this situation we hit a stop on half of the play at $138. We hit another stop 25% of the original play at $134.90 and the stop on the last piece is $128.50.

Emotions are a tough thing to deal with when it comes to managing positions like Amazon. The tendency is to think it will run forever. The stock is fundamentally sound, but the price doesn’t line up with the outlook and projections. It will balance out with a combination of better earnings and a price drop. When the value lines up accordingly we can always buy the stock back. In the mean time a gain of more than 150% over the last 12 months isn’t bad.