You're Nuts If You See Amazon's P/E as a Buy Signal

NEW YORK (TheStreet) -- As an investor you have choices, and you need to choose well. More than 5,000 stocks are available, and it may appear daunting at first, but you can eliminate most of them in less time than it takes waiting to hear "sell, sell, sell," during tonight's episode of Mad Money.

One stock you don't need to spend any time looking over is Amazon ( AMZN). Yes, I know it popped higher on an analyst upgrade, but if you think that's a buying signal, allow me to let you in on a not-so-hidden secret. Ready? Stocks will often peak on analyst upgrades, and bottom on analyst downgrades.

Don't believe me, no problem, take a look at the dates when any given stock made a bottom or top and then look for analyst updates. Analysts call the tops and bottoms (wrongly) way too often than by pure chance. I am not suggesting they are trying to deceive anyone, but analysts are like most people, they let emotion influence their calls too.

If you're asking the next obvious question, "can investors fade analyst announcements?" the answer is much of the time yes. This is especially the case with stocks that are already trading at a large premium to their peers.

Sure, an industry leader should trade at a premium, but when the premium becomes foolish, well, you know what they say about a fool and their money. Amazon's bulls can be forgiven for their arousal after Amazon's share price appreciation since November.

The perma-bulls shouldn't get too excited though, in Amazon and the Coming Onslaught article I wrote in September, I warned the risk wasn't worth the possible reward.

Amazon increased $13 from article publication, but in order to realize $13, shareholders had to suffer through $35 of unrealized losses and almost four months to get here. If you're the kind of investor that doesn't believe in using stop losses, then everything is great, damn the torpedoes, full speed ahead! Just don't forget about the fool and their money comment earlier.

Investing without stop losses is like going all in during a poker game. It works every time but once. It's the once that wipes out all your gains for last year, this year, and for some, the gains for the next five years.

We are going to party like it's 1999! I feel like I am back in the 90s after reading my good friend Rocco Pendola's article Amazon's P/E of 3,000: The Ultimate Buy Signal.

Pendola writes that very few people actually short Amazon and he's correct. The short interest is relatively small, however, based on the trading volume, the number of days to cover for shorts is trending higher. Also, short sellers are the smart money, they know that inflated valuations can last well beyond their ability to carry the position.

Whitney Tilson and T2Partners come to mind with his Netflix ( NFLX) short position. After placing a sizable short position and writing about it at the end of 2010, he followed up in February 2011 with another article why he covered his short position. On Feb. 11, 2011, Netflix closed at $231 a share. Eight months later Netflix traded for less than $75 a share.

Being right isn't good enough, you also have to time your entries and exits or you still lose. This law of investing must be obeyed by both longs and shorts or they will face the judgment of the marketplace. Undoubtedly, there is a lot of money sitting on the sidelines to short Amazon, but fund managers want to see a showing that the unbridled enthusiasm is waning.

If you're hell-bent on making rookie investor mistakes while flashing warning signs surround you, you might as well play Prince on your MP3 player and relive the day trader go-go days as realistically as you can.

Pendola is right about not digging your heels in and ignoring the reality of the ultimate valuation judge, the market. As long as the market declares Amazon isn't required to provide a return on investment, the stock will remain at "mind numbing" levels.

Pendola makes a valid point in respect to Cramer not using Amazon's price-to-earnings ratio when assessing the company's financials. That's all fine and dandy for Cramer, but you're not likely at the investing caliber of Cramer, so just maybe ...you want to use every possible metric you can. The choice is yours, but dismissing every possible piece of information is at your own peril.

I don't share Pendola's opinion that measuring P/E's are now no longer relevant. Sorry, but I heard this all before many times. In the 1980s, it was Japan, and they were going to take over the world. I saw this first hand as I lived in Japan during the height of their bubble.

In the 1990s, it was anything dot com, and I am relatively sure anyone reading this remembers hearing "you can't lose money in housing; they're not making any more land... yada yada yada". Now we have social media's Facebook ( FB) and federal debt that is the new bubble.

Cue: "The Song Remains The Same" -- Led Zeppelin

Amazon may continue higher; no one knows, and if they do, they are not telling. Just because a stock may increase in price, doesn't mean the risk is worth the reward. Keep that in mind when considering Amazon.

It's OK to shop at Amazon (my family does), but if you want online commerce in your portfolio, look towards Apple ( AAPL), Google ( GOOG), Yahoo ( YHOO) and Ebay ( EBAY).

These online companies have the same potential as Amazon, without the super-sized price tag. In fact, they all compete effectively with Amazon with lower downside risk and growth potential.

At the time of publication the author held no positions in any of the stocks mentioned.

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

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