In a January 18 post I listed several stocks that I had on my watch list:

Akamai Technologies Inc (AKAM) - $26.64 (01/17/08 close)
Cisco Systems, Inc (CSCO) - $24.33
3M Co. (MMM) - $74.96
Intel Corp (INTC) - $19.33
McDonald’s Corp (MCD) - $51.98
General Motors Corporation (GM) - $22.84
Starbucks Corp (SBUX) - $19.05

I subsequently took long positions in five of these stocks:

AKAM purchased at $27.37 (on 01/22/08)
INTC purchased at $18.54 (01/22/08)
CSCO purchased at $23.44 (02/06/08)
MMM purchased at $73.65 (01/22/08) sold at $77.05 (04/25/08)
SBUX purchased at $16.48 (04/30/08)
Thankfully, I avoided GM.

Although not on my watch list, I also purchased shares of Transocean (RIG) at $162.07 on 05/20/08). This is a great way to play the supply constraints with crude oil, as Transocean is one of the largest providers of offshore contract drilling services for oil and gas wells, particularly in deepwater and harsh environments.

Today, I have my eyes on FedEx (FDX), currently trading at about $79.25 and Ford (F) currently trading at about $5.35.

Not sure what the catalyst is, but AKAM is down about 20% over the past month - this, since rebounding 35% from the near-52 week low of $25.88 it hit back in mid-January.

We recommended taking a close look at AKAM back on January 18th, when the stock was at $26.64, and we do so again today.

* full disclosure: i own shares of AKAM (purchased shortly after my Jan 18 recommendation)

The following stocks are approaching valuation levels that I believe would make them highly attractive long term (more than one year) buying opportunities.  All of them have come down significantly from their 52-week highs (some, such as Akamai - down 55%, more than others).

Most of these companies are leaders in their field with strong balance sheets and cash flow.  Others, such as General Motors, have a significant turnaround opportunity ahead of them (strong slate of new car models - Malibu, Enclave, etc., substantial declines in labor costs) once we get beyond the current economic malaise.  And, most have strong international exposure (geographic diversification) and overseas growth opportunities.

Akamai is probably the riskiest bet of the bunch (although some might argue that GM is even riskier), yet, its core business of speeding the delivery of content around the web offers the best opportunities for continued long-term growth.

The best way to play GM, may be to purchase long-term options (the Jan 09 $25’s are currently going for $4.30 and the Jan 10 $25’s are going for $5.90).  This is a great bet if you believe GM will turn itself around even modorately and the econimc downturn will be relativelty short-lived.

Akamai Technologies Inc (AKAM) - $26.64 (01/17/08 close)

Cisco Systems, Inc (CSCO) - $24.33

3M Co. (MMM) - $74.96

Intel Corp (INTC) - $19.33

McDonald’s Corp (MCD) - $51.98

General Motors Corporation (GM) - $22.84

Starbucks Corp (SBUX) - $19.05

KNOT was recently trading at $13.73. At this level, the shares are starting to look pretty attractive. The Knot’s PE is now around 28x and its Enterprise Value to EBITDA is just under 14x. Given organic top-line growth in the low 20% range and projected earnings growth of 30%, KNOT’s valuation is compelling.

* Full Disclosure:  I own the AMZN Jan 2008 70 puts

Despite a forecast for declining margins in the 4th quarter, Amazon.com (AMZN) finished at $88.73 yesterday, down just 2.8% below the $91.28 price the stock had been at when the market opened the previous day (before surging nearly 10% that day on euphoric earnings expectations).  Further, according to MarketWatch.com, 12 of the 22 analysts that cover the stock actually increased their target price on AMZN by an average of 12% after the earnings release.  This is a stunning outcome.

Amazon has surged more than 120% since April due almost entirely to an improving profit margin story.  Analysts have chased the stock upward with ever-increasing price targets as CEO, Jeff Bezos, delivered on Wall Street’s request for decreased technology investment spending.  Rapidly expanding margins have served as the catalyst behind the stock’s sky high forward PE of nearly 60x.  That’s a PEG Ratio (PE to Growth) of 2.5x, compared with Google’s (GOOG) PEG of just under under 1x, Apple’s (AAPL) of 1.3x and eBay’s (EBAY)of 1.2x.  SEE ANALYSIS BELOW.

Another sign of possible trouble ahead for Amazon - seemingly overlooked by Wall Street - was a downbeat forecast from UPS for holiday sales released yesterday.  UPS cautioned that this year’s surge in peak-season deliveries is likely to be the weakest since 2003.

Two other reasons to be cautious about Amazon: (1) analysts are overly bullish on the prospects for the third-party sellers program that has helped Amazon grow revenue and expand margins.  It won’t be long before Amazon has to cut back on this program due to a rise in customer complaints related to less-than-Amazon-level quality service (e.g. inventory availability issues, etc); (2) it won’t be long before Amazon needs to begin investing in technology again to keep pace with its competitors (Wal-Mart.com, Target.com, etc) and customer expectations for top web companies in general.

Omniture (OMTR), the largest pure-play web analytics company, is incredibly overvalued at its current price of $34.50 per share.

This company is the dominant player in a great space - web traffic reporting and optimization tools (recently announced a smart acquisition of a company called Offermatica).  However, a quick, back-of-the-envelope analysis shows that OMTR is worth no more than $27 per share:

The company will do around $139.5 million of revenue (around 72% year-over-year growth) and $20.5 million of adjusted EBITDA this year.  Assuming they grow revenue 60% next year and then 50% in 2009, they will do about $335 million of revenue and $84 million of adjusted EBITDA (this assumes they can grow EBITDA margins from the mid-teens in 2007 to 25% in 2009).  Applying a 15x EBITDA multiple implies a $1.255 billion enterprise value and $1.4 billion equity value ($146 million of cash on hand, net of debt). With about 51 million shares outstanding, that implies a share price of $27.59.

I’d buy the Dec ‘07 $30 puts (MOQXF), currently trading at $1.80.

Crazy Prediction: Mark Cuban will purchase Imax Corp (IMAX) as a distribution play for his HDNet and film ventures.

The New York Times ran a story in its Sunday business section that reinforces the point I’ve been making about the massive valuation discrepancy between Amazon (AMZN) and Google (GOOG). In a story called The Human Touch That May Loosen Google’s Grip, Randoll Stross, a professor of business at San Jose State University, points out:

Profit margins in the search business are mind-boggling, and cannot be obtained in other segments of the technology world. Google’s net profit margin last year was 29 percent. Amazon’s was 1.8 percent — yes, that is a “1” followed by a decimal point. Which business would you rather be in?

Even the biggest AMZN bulls would be hard-pressed to justify the stock’s valuation relative to GOOG.  AMZN is trading at a 134% premium to GOOG when comparing the 2008 average PE-to-growth ratios of the two stocks (and a still hefty 77% premium when using the top estimates of both stocks).

Amazon (AMZN) rose 4.6% yesterday, hitting a seven-year high of $73.65.  The reason for the surge - Jeff Bezos announced that the company plans to increase its investment in China, where its Joyo.com unit is Amazon’s fastest growing business. After a quick look at the most basic facts, you’ll see why this is completely insane:

The Wall Street Journal reported that according to Analysys International, a Beijing tech consulting firm, the entire Chinese online-retail market accounted for $133 million during 1Q2007.  Amazon’s Joyo.com unit is the #2 player in the market with a 12% share (behind #1 player Dangdong.com which has an 18% share).  So, Joyo.com generated roughly $16 million during 1Q07, which representes a whopping 0.53% of the $3.02 billion that Amazon generated overall.

So let me get this straight, Bezos created $1.3 billion in market value for Amazon by announcing that the company would be investing more in China where its relatively insignificant Joyo unit lags behind its chief local rival.  Sure, Joyo could one day become a major contributor to Amazon’s revenue (and profits), but it will take major investment to get there and one of the main reasons AMZN has had such an incredible run lately is because Bezos said the company would be cutting back on its investments to boost profit.

Not surprisingly, no Wall Street analysts have raised the above issue.  As AMZN approaches trading at 75x 2007 estimates (and 50x even the highest 2008 estimates), they just keep raising their price targets and providing shoddy rationale for doing so.

Where’s Henry Blodget when you need him?

On May 17, we recommended buying puts on Amazon (AMZN).  Since that time, the stock has traded up about 9% and the July $60 puts have gobe from $2.35 to around $1.15.

** Full disclosue - I purchased the July $60 puts at $1.70 on May 21.

Nothing has changed fundamentally with the story on Amazon, so we now STRONGLY reiterate buying the July $60 puts.  TheStreet.com has a good piece on the recent surge in valuation: Amazon Ripping the Shorts

Here’s further evidence that shares of AMZN are insanely valued at current levels, particularly when compared to other a basket of comparable growth stocks - Google (GOOG), Apple (AAPL), eBay (EBAY) and Starbucks (SBUX).  You’ll see that AMZN’s valuation relative to its growth rate (PE/Growth, or PEG Ratio) is more than double that of the basket of comparables.  Amazon should be trading in the mid-$30s.

Shares of Amazon.com Inc. (AMZN) are currently trading at just above $63 per share.  That’s 55x even the most bullish estimate of $1.14 per share for 2007 earnings.  At 25% projected annual earnings growth over the next 5 years, that gives AMZN a PE/Growth ratio of 2.2x.  Sure, we all love and use Amazon to have everything from the latest Harry Potter book to 2.5 lb. packs of rattlesnake meat conveniently shipped to our homes.  And, yes, AMZN did surprise investors with a particularly strong 1st Quarter (prfit margins expanded for the first time in two years). 

But, does that make AMZN significantly more valuable than other stellar performers? By comparison, Google (GOOG) is currently trading at about 31x earnings for a PEG ratio of 1.0x, Apple (AAPL) is also trading at roughly 31x earnings for a PEG ratio of 1.5x and Starbucks (SBUX) is trading at roughly 32x earnings for a PEG ratio of 1.4x.

Therefore, we would recommend purchasing the July ‘07 $60 puts (ZQNSL.X) - currently trading at $2.35 as a way to play this current overvaluation.

By the way, we do like GOOG at $472 a share.  We also suggest keeping an eye on TheStreet.com (TSCM) – start buying if it gets to the low-$10 range.  And, TheKnot.com (KNOT) is starting to look attractive again at around $18.75 per share – we’d be buyers if it goes below $18.