Many believe the “FANG stocks” are supposed to trounce the market time and time again, no matter the market conditions.
That has not been the case in 2019 for one FANG Stock.
While the S&P 500 has steadily climbed 22% in 2019, this stock has lagged with just a 16% gain.
Not bad by any means. But underperforming the market is not what any investor sets out to do.
So does that mean we should avoid the FANGs? Not a chance.
The FANGs dominate the economy. They are technology leaders representative of revolutionary change.
They are monopolies with pricing power. FANGs should be a part of every portfolio.
So what do we do when a FANG stumbles and lags behind the market?
We buy more.
The reason for the underperformance will likely be corrected in no time. Here’s the FANG stock we think is severely undervalued right now…
You May Not See This FANG Stock at This Price Ever Again
In the case of my favorite FANG stock Amazon.com Inc. (NASDAQ: AMZN), there is no obvious reason for the underperformance in 2019.
The stock has only appreciated 16% in 2019, compared to about 23% for the S&P 500.
Frankly, those numbers should be reversed.
Just look at the fundamentals. In 2020, AMZN is expected to earn a whopping $27.20 per share. That’s growth of nearly 32% from what’s expected for the full-year 2019.
Companies this big just don’t grow earnings at that rate. Except for Amazon.
Perhaps what is happening with Amazon shares has more to do with psychology rather than fundamentals.
Investors behave irrationally when markets are at historical highs.
For some reason, it’s difficult to imagine a world with even higher highs.
Amazon has an even bigger psychological problem with its own lofty share price.
There is something challenging about buying a stock that trades for nearly $1,800 per share.
And yet given Amazon’s attractive valuation and fundamentals, that is exactly what you should do today.
Whatever market the company takes on, that industry is forever changed. And when it changes, Amazon ends up making more and more money.
That’s the power of this company.
When Amazon is the only option, it essentially can and will charge whatever price is needed to keep shareholders happy.
Despite this, AMZN shares have pulled back more than 10% since mid-July. That’s our opportunity.
Take a look at the numbers.
At the current price of $1,800 per share, Amazon has a P/E ratio near 80. But given its monopolistic power, Amazon deserves a much higher valuation.
The market will reward that monopoly power sooner rather than later.
Consumers are clamoring for Prime, Amazon’s most important subscription service.
Prime is where Amazon can really flex its power.
At the drop-off a hat, the company can raise the price of Prime without missing a beat.
The services included in Prime are in such demand, Amazon can literally charge whatever price is necessary to ensure that profits continue growing at a rapid clip.
There are very few stocks out there with similar power.
What is a fair valuation of Amazon?
Psychologically speaking, Amazon is struggling with the $2,000 level, a price that would also bring a trillion-dollar market capitalization into play.
Those are heady numbers indeed, but numbers that should not be feared.
In due course, Amazon will trade for more than double today’s price.
A $5,000 target is in play and the fundamentals suggest such a level is not only possible, but probable.
Put a 100 multiple on next year’s earnings and you arrive at a price of $3,000 per share.
That’s almost double today’s price.
Take any pullback in the AMZN share price as an opportunity to add to your long-term position.
— Jamie Dlugosch
Source: Money Morning