1. The most inexplicable share price
Amazon.com, Inc. (NASDAQ:AMZN) kept me on the sidelines with its low profits and crazy P/E, before the company drifted into losses. That was my mistake, though I do not think I was alone with that one. Amazon.com, Inc. (NASDAQ:AMZN) is still scary and I would get downside protection for any investment. The company is my go-to for shopping, and the store is massive. They carry so many products directly or through the marketplace that are odd, but useful or just cool. This is beyond the popular stuff you see on the front page.
The stock has persevered despite the consistent low profits. Grabbing market share is fine, but when is a company supposed to switch gears and actually try to make money. Amazon is trying different things. I have mentioned that my favorite is the leasing of compute capacity, though I do like the company launched publishing houses.
What do you do about a company that has very little profit with a share price that just grows and grows? Probably, the most instinctual response is to say Amazon.com, Inc. (NASDAQ:AMZN) is overvalued, but it would be considered overvalued at a PE of 100. Now, it is a company that went from a PE in the hundreds to losses, without seeing the share price collapse. I wonder if the company would be able to boost its margins to generate enough profit to eventually satisfy shareholders.
The low price of Amazon’s products, even with sales tax, is so important to the company’s success. I hold nothing but disdain for people thinking that the sales tax issue is going to push people back to brick-and-mortar businesses. As if paying sales tax on Amazon.com, Inc. (NASDAQ:AMZN), which I would pay at any store, is going to make me less lazy.
2. Decade of thumb twiddling
I think Cisco Systems, Inc. (NASDAQ:CSCO) will one day trade in a way that reflects its underlying fundamentals. I am sure there is some vehement disagreement with this one, and it might seem self-serving. I would not have taken a position if I did not think Cisco would one day be above the low $20s.
Revenue and net income have been increasing and Cisco Systems, Inc. (NASDAQ:CSCO)’s P/E ratio has been falling, which would be noticeable except that the price has risen a bit from the sub-$20 days. I do not see that as reasonable. Despite all the concern about the future, the current situation is an uptrend in revenue and profit. Some ethereal future is no reason to keep Cisco down. It has over $40 billion in cash, and can do what it likes to boost growth if things get dire.
There might be some concerns about the company’s course for the future, and it is fashionable to hate on management. Cisco Systems, Inc. (NASDAQ:CSCO) is being a bit tentative in how it tackles the future, but I am not sure what the company is going to do about the future. I do not support Cisco Systems, Inc. (NASDAQ:CSCO) chasing the dream of being a growth stock, because that will only end horribly.
In my opinion, Cisco Systems, Inc. (NASDAQ:CSCO) just needs something that draws interest to its lasting strength. I think it is reasonable to see it rise a bit higher, preferably $30. Plus, it has been stagnant for the better part of a decade, and with revenue and profit increasing, it makes no sense for a stock to remain where it is, which is a simple yet acceptable reason.
3. Back from the edge, stuck in a rut
I wanted to find something I hadn’t written about for the third one, and I have landed on Sirius XM Radio Inc (NASDAQ:SIRI). Sirius XM Radio Inc (NASDAQ:SIRI) was one of my first investments ever. I think it was 2006 or 2007 when the price was right around $1. In my opinion, Sirius XM Radio Inc (NASDAQ:SIRI) defies reason because it managed to pull itself up from the brink in an amazing turnaround. However, despite that and some solid looking fundamentals, it is trading lower than I would expect. In a market where Netflix, Inc. (NASDAQ:NFLX) makes an insane move every few weeks, Sirius stands flat.
The company has its share of issues, but flat is the last thing I would expect. I would expect it to be rising with its steadily increasing revenue and its P/E around 6. The company also as a PEG ratio of 0.0094 and ample cash, which is a strong foundation and the potential for massive growth compared to the current share price. On the downside, I see inconsistent earnings. Sure they are positive, but they are not increasing regularly.
The increasing revenue signals to me that Sirius is a buy. The ample cash provides a nice net for the company to absorb the cost of expansion. I think Sirius is well on its way to becoming mainstream as people accept getting subscriptions for high quality content as the norm, even when there is a free alternative such as traditional radio. Echoing that, the company added 2 million subscribers in 2012, and that is the highest in one year since 2007.
Conclusion
Defying reason does not mean that there is a legendary trade, but these stocks strike me as strange in some way. Cisco Systems, Inc. (NASDAQ:CSCO) is probably the most boring on the list, but it has been in its current range for far too long. Cisco is a strong company and I think it is overdue for a run.
Amazon.com, Inc. (NASDAQ:AMZN) is not something I can understand with the tools available to me. If I were to risk a position on Amazon.com, Inc. (NASDAQ:AMZN), I would have it backed up by owning puts, but my fear stems from a lack of understanding, not from anything specific. The extra cost of the premiums is probably worth the security. It would cost quite a bit though. Sirius is only strange in light of the current environment that tends to be extremely volatile, but the company impresses me with its return from sub-$1 and rising revenue.
The article 3 Stocks That Defy Reason originally appeared on Fool.com and is written by Nihar Patel.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
