NEW YORK (TheStreet) -- There are counterintuitive investing strategies, and then there is this: The worse some companies perform, the better some investors perform.
Take a long hard look at Amazon's 2013 Security Exchange Commission Annual Statement. These easily downloadable, once-a-year, so-called Form 10-Ks offer what investors desperately need in today's nanosecond-long investor news cycles: a stately, year-by-year analysis of what a firm such as Amazon really does, what it really makes and what its real prospects are.
After a few weeks of breaking down Jeff Bezos & Co.'s annual filings, wouldn't you know it if the strangest-of-strange investing strategies emerged. That is, if investors really want to crush it in 2014, what they are looking for is not companies that perform brilliantly ...
But ones that perform poorly.
Amazon dries up
The twisted logic of the Digital Age is apparent right from the top of Amazon's annual statements. For starters, the Seattle, Wash., online retailer appeared to have a boffo 2013. Revenues grew to $74 billion from $61 billion the year before. More importantly, Bezos finally put some money in the bank.
Net earnings jumped to a $274 million gain from a $39 million loss in 2012.
This roughly eight-times profit spurt seemed to indicate that Amazon was finally flowing with real Web gold -- that is, until investors compared these 2013 figures to 2011's. Yes, sales did grow by 54% over those two years. But look closely at the annual income statements for each year and what you will see is that operating income -- you know, what it costs to actually, eh, operate -- fell(!) by roughly 14% during those 24 months.
We need not turn to Wikileaks to learn what was sucking Amazon dry. The operation has a terrible problem of spending more than it makes. Total operating expenses, mostly in spiraling general, administrative and sales costs and out-of-control research and development fees grew by 56.2%, while sales grew by only 55%.
That 1.2% gap sounds like nickel-and-dime stuff, save for one fact: Amazon's net earnings are measured in fractions of a penny.
Starting all the way back in fiscal 2010, the world's largest and most powerful Web retailer really only has the leverage to keep just 3.5 cents of every dollar it sold. By last year, this annual net profit margin fell to just 0.4 cents on the dollar. Point four cents!
Or, said another way, the cost to operate is growing four times faster than the money Amazon makes. And worse, at least in North America where the average inflation rate runs about 1.5%, Amazon's meager net profits indicate it hasn't made a dime in inflation-adjusted dollars for the past three years.
The truth is, at least from the annual statement perspective, Amazon is not a massive river of cash; but a mere wandering iceberg slowly melting in the warming sea.
But too big to fail
Now comes the strange part. In spite of this nightmarish 2013 operating performance story, Amazon's stock went wild last year. The ticker was up in 60% range over the past 12 months -- maybe more by some counts.
Traditional analysis would indicate that eventually time catches up with Amazon and some sort of correction for the stock is in the offing. But let's be honest, no such rationalization for AMZN is anywhere at hand. This ticker's run-up is so big and its market cap so large that teasing out a practical way to bet against this stock is essentially impossible. What other business would be foolish enough to try to compete with a firm that can burn resources on the scale Amazon can?
And that leads us to a bizarre but fascinating investor notion: If you really want to pick winners for 2014, the trick is not to flee from companies with feeble operating stories, but to embrace the right ones. That is, to go out and find the other Amazons looking for investor love -- the Web-based information companies that can perform poorly enough to keep out competitors but are big enough to hide feeble operating results behind sheer size and the drum beat of near-term quarterly results.
Investing in the Information Age turns out to be like the Olympics but backwards. You earn gold betting on losers.