Motley Fool: A buy-and-hold contender

If you’ve been wishing you owned stock in Amazon.com (Nasdaq: AMZN), now could be a good time to buy. Its shares were recently down about 34 percent from their 52-week highs, and there’s good reason to believe that buying now could pay off handsomely in the long run.

Amazon is a titan in e-commerce, boasting a 49 percent U.S. market share. With e-commerce accounting for nearly 10 percent of all retail sales, there’s still plenty of room for further e-commerce growth. Amazon Web Services, the company’s cloud-computing division, is another powerful profit center. It’s posting strong growth rates and locking large commercial clients into longer-term commitments, which will allow it to fend off challengers and continue to command this industry.

An even bigger growth opportunity may lie in the company’s nascent digital advertising division. It’s posting annual growth rates greater than 100 percent in this high-margin business, and it’s now the third-largest digital advertising platform in the United States.

Amazon’s assets also include more than 100 million Prime members, its Alexa technology and the Whole Foods Market business that it bought in 2017. (The Motley Fool owns shares of and has recommended Amazon.com. Whole Foods’ CEO John Mackey is on The Motley Fool’s board of directors.)

Ask the Fool

Q: I observed a stock start trading one morning at a price very different from where it closed the day before. Can you explain that? – F.W., Greensburg, Pennsylvania

A: There may have been a stock split, or some big news (or rumors) may have broken after the market closed. If, for example, the company is being bought out or it posted an unexpectedly good or bad earnings report, that could have caused buy or sell orders to pile up overnight, resulting in big overnight price moves.

Stock prices simply reflect supply and demand, so if lots of people want to sell, the price will fall to a point at which some will buy – and vice versa. After-hours trading, which occurs before the market opens and after it closes, is another factor.

Q: Are share buybacks good for a company’s shareholders? – P.A., Tulsa, Oklahoma

A: It depends. If a company buys back shares when they’re overvalued, it’s wasting money that could have been spent in more productive ways (such as being paid out as a dividend or used to grow the business). But if it repurchases shares when they’re undervalued, that benefits shareholders.

The shares bought back on the open market are essentially retired, leaving each remaining shareholder owning a bigger piece of the company. For example, imagine that earnings at the Rubber Chicken Catering Co. (ticker: CHEWY) are $3 million and it has a million shares outstanding. Its earnings per share are thus $3. If CHEWY buys back a tenth of its shares, leaving 900,000, then its EPS suddenly rises to $3.33 ($3 million divided by 900,000). Still, investors should prefer earnings to grow mostly because of business growth, not share buybacks.

My dumbest investment

My dumbest investment was buying shares of Citigroup. Something I read made me see it as a promising investment, so I bought some shares, only to see them fall in value by more than 90 percent. I hung on while they recovered a bit, and sold for a significant loss. I should have used a stop order.

Another dumb thing about this is that during this period, I left for a safari vacation and wasn’t able to track my stocks. – L., online

The Fool responds: Citigroup was one of many financial institutions to get whacked by the subprime mortgage crisis, and its shares are still trading well below past levels. After many layoffs and billions of dollars written off, it’s on sounder footing now.

A stop, or stop-loss, order can indeed prevent such losses, as it directs your brokerage to sell your stock if it falls to a certain price. But remember that many good stocks are somewhat volatile, and stop-loss orders can get you ejected out of stocks that hiccup temporarily, causing you to lose out on future gains.

As for the safari, most investors shouldn’t have to monitor their holdings every day (or hour!), standing ready to sell at any moment. Superinvestor Warren Buffett has said: “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”