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An Out-of-Touch Value Investor Responds to Rocco re: Amazon

NEW YORK (TheStreet) -- We are the value investors. Considered to be old, wrinkled curmudgeons of a bygone era by many, we have methodologies and beliefs that are often questioned, especially during huge market upswings.

That's when many of us go into hibernation, because we simply have difficulty finding companies that meet our stringent investment criteria. During these times, we are probably doing more selling than buying. Slow afoot and advanced in age, most of us don't even own computers; our calculations are made via the abacus, and all the financial data we need come from Value Line at the local library, since we are too cheap to buy our own subscription.

When we argue that fundamentals still matter, we are told that the old metrics are hogwash. Price-to-earnings ratios, measures of free cash flow and multiples of tangible book value are meaningless in the new paradigm. None of those ancient benchmarks of value applies in the new world of investing.

As long a as a company can increase revenue, the bottom line really doesn't matter; as long as companies can provide the latest convenience, who cares whether they ever generate significant cash flow? As long as the chart continues to look good and investors continue to pile into the stock, what else matters?

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If it's cool, if there's a buzz about it, then you must own it. If the online retailer floats the idea of delivering products to customers via drones, then buy some more. When they finally set up a distribution center on the moon, mortgage your house and buy even more.

In his column yesterday, Rocco Pendola skewered me about my views on Amazon(AMZN). He told me he was going to, but I still nearly fell off my dinosaur when I read it. (I actually enjoyed his piece, as I do many of his columns.)

I get his argument, too; just because we've seen high-flying companies crash and burn in the past doesn't mean that Amazon will follow suit. He's right about that, especially if "following suit" in this case is a reference to some of the 2000-era tech-bubble companies that didn't have real businesses.

Sit down, Rocco, this might shock you, but I do believe Amazon is a real business. It's also one of the greatest innovations in retailing we've ever seen. That's not in question here.

But what is in question is the value of the company. Is it worth 143 times next year's earnings, and 71 times 2015 estimates? What is the future for this company in terms of the bottom line? To increase sales rapidly is wonderful, but that ultimately needs to translate into meaningful earnings.

Well, that's if you believe as I do, that earnings matter. Do earnings matter, Rocco? Ultimately, shareholders will care. They may not right now; they are riding the gravy train of momentum. Do you really think that will last forever?

That's where some small investors get hurt; they're the last to join the momentum party and the first to feel the effects when it comes to a halt.

Yes, Rocco, there is momentum, and it is real. Yes, Rocco, it can continue to run for much longer than many believe it can. But it can also end badly. That's the issue when you have a stock priced for perfection, as I and some others believe Amazon is.

This is not about innovation or technology that simplifies our lives. It's about a high revenue growth company ultimately having to generate a bottom line. It's about a disconnect between price and value. It's about a shiny object that is worth $1, but many are willing to pay $2. For now, anyway.

Rocco, it's on. Let's revisit this in one year. One dozen doughnuts from Krispy Kreme(KKD) says that Amazon is trading lower.

I could write about this all day, but need to get my pet dinosaur to the vet.

At the time of publication, Heller was long Krispy Kreme.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Jonathan Heller, CFA,CFP® is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

  Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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