One a winner, a relentless disruptor that will continue to dominate e-commerce and will likely face a dramatic expansion in margins and a better than expected trajectory of least-squared EPS growth. (This trajectory has been articulated well by Jim “El Capitan” Cramer’s “When The Death Star Strikes“). With 45 buy recommendations and zero sell recommendations, Amazon’s stock is not undiscovered.
The other, a loser, beaten up by its competitors and by management’s incompetence, arguably worsened by its fraudulent attitude towards some of its customers. (Here is the 1Q2019 conference call transcript.) The bank had the indignity of being hit with a slew of downgrades following its lackluster first quarter report and weak net interest guidance – with Evercore, Goldman Sachs and Buckingham all lowering their price targets for Wells Fargo. (Over the next three months I expect more brokerages will be recommending sell than are recommending purchase – as lemmings, even of a research-kind, move in herds).
However, for me, an analysis of potential intermediate-term upside reward vs. downside risk, provides the rationale to own both of the stocks.
Amazon’s business opportunities, as I have documented repeatedly in 2019. are superior to almost any company extant. With the existential regulatory and antitrust risks reduced, vertical and horizontal growth for this early adopter seems unparalleled.
Wells Fargo, by contrast, has still maintained (throughout all its problems) a large consumer deposit base which, in the fullness of time, can make up for a lot of past organizational and operational sins – that franchise is the essence of the bullish case for the banks. This will be especially true when interest rates “normalize” and net interest margins and income expand – which I guarantee all of you will happen if one hold’s to an intermediate term time frame and view of the shares. The bank’s large deposit base is at the heart of the franchise’s intermediate- to longer- term profit prospects. In the interim interval I can afford to wait as a near 4% dividend yield supports the stock and brings the investor a front end “return” relative to the term structure of interest rates that exist today.
Despite Amazon’s straight up move from late December (I placed the shares on my Best Ideas List on December 26th at $1383; its trading at $1853 in the pre-market session this morning) there is little question that it’s share price will likely have rather large drawdowns along the way to my (hopeful) price targets of $3000 in 2021 and $5000 by 2025.
By contrast, Wells Fargo’s share price of $46.90 will not likely face such volatility – countering what I expect to be an exciting but volatile ride in Amazon. Though my conservative Wells Fargo price target of $65-$70 in 2021 and $100-$110 in 2025 don’t provide the percentage upside of Amazon – it is still rather robust from the base of today’s low price.
Amazon and Wells Fargo – two distinctly different securities that hold the promise for attractive returns over the next five years.
Both stocks can coexist in a long-term investment portfolio.
(This commentary originally appeared on Real Money Pro on April 16. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass’s Daily Diary and columns from Paul Price, Bret Jensen and others.)