Avoid These Nasdaq Prima Donnas

03/08/2011 12:10 pm EST

Focus: STOCKS

Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

Wall Street still has too much unrequited love for Amazon and Cisco, given the tech giants’ ugly trading charts, write Bernie Schaeffer and Joseph Hargett of Schaeffer’s Investment Research.

A recent MarketWatch article (“Amazon’s streaming entry may hurt margins,” February 28), dissects an unusually negative stance on Amazon.com (Nasdaq: AMZN) following the company's launch of free streaming movies for Prime subscribers.

Specifically, UBS downgraded Amazon to "Neutral" from "Buy," while cutting its price target to $180 from $195. What's more, UBS analyst Brian Pitz "told clients that increased investment in movie rights and infrastructure will likely further pressure operating margins."

"We note margin is already pressured from continued investment in IT and fulfillment centers," Pitz told clients in a research note. "It now looks likely Amazon will need to invest in 1) acquiring content, 2) distribution deals, and 3) technology."

With the increased pressure on margins, Pitz also believes that Wall Street's consensus earnings estimates for AMZN's second half of the year are too high, with many brokerage firms not factoring the free streaming service into their expectations.

Contrarian Takeaway
The bearish attention Amazon attracted from UBS is quite interesting, since most of the financial media saw the video-streaming announcement as a positive for the company and a negative for industry leader Netflix (Nasdaq: NFLX).

It also presents a very real problem for Amazon, given the heavy overall bullish stance from the analyst community. For instance, Zacks reports that 22 of the 36 brokerage firms following the stock rate it a "Buy" or better, with only two "Sell" ratings to be found.

Additionally, Thomson Reuters reports that the average price target for Amazon rests at $190.77 per share—a premium to the equity's current trading range south of $170. With Amazon's streaming service potentially hurting margins and second-half earnings, it could prompt some of these bulls to reevaluate their positions.

And, as you can see, there is plenty of room for potential downgrades or price-target cuts.

Technically speaking, Amazon has struggled in 2011, losing 6.3% as of mid-morning Tuesday. By comparison, the Standard & Poor’s 500 index is up 4.7% during this time frame, while the tech-laden Nasdaq Composite has added 4.1%.

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What's more, Amazon has slipped beneath former support at the $175 level, and is now staring up at potential resistance from its ten-week and 20-week moving averages. Any additional shifts toward the bearish end of the spectrum from Wall Street analysts could exacerbate selling pressure in an already degrading technical outlook.

Next: This Has All Happened Before

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This Has All Happened Before
A month ago, Cisco Systems (CSCO) disappointed the Street with its latest quarterly report. As a result, the stock spent the rest of the week in the tank—and the blue chip's slide has since continued.

What's more, Bloomberg suggests (“Cisco Call Wagers Jump After Stock Plunge,” February 24) sentiment remains optimistic toward the underperformer, which could point to even more downside, from a contrarian perspective.

In summary, the article revealed three things about the Street's post-earnings opinion of Cisco:

  • The analysts are still bullish even after the earnings disaster
  • Call-option buyers are also bullish
  • The analysts are citing the call-option buyers as a reason to be bullish

So here we have those who have been "long and wrong" for a decade on Cisco—citing those (call option buyers) whose opinions you'd generally want to discount—in support of their continued bullish outlook. This looks to me like a contrarian gift to those who would be bold enough to short Cisco or buy Cisco puts here.

Echoing that sentiment, our Senior Technical Strategist, Ryan Detrick, noted that the most-read Barron's article on February 22 was "Playing a Cisco Dead-Cat Bounce," which further reflects the Street's undying adoration.

Plus, as our Quantitative Analyst, Chris Prybal, pointed out, Cisco kept pace with the Nasdaq over the past ten years, but since 2010 has tremendously underperformed the tech-rich index:

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Considering Cisco's market cap is $103 billion, this sets up the "cheap stock based on price, expensive stock based on market cap" bull trap.

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