Amazon’s Holiday Results Raise Questions

Amazon.com, Inc. (NDAQ: AMZN) is one company that tends to profit when others in its industry do poorly. The retail industry has been crippled by sharply lower consumer spending and higher costs, which has begun to shift the trend towards online retailers like Amazon.com. The book store turned everything store recently reported its best Christmas ever in a recent press release.

The press release drew some criticism from the investment community as it lacks some key facts. CNBC’s Fast Money noted that it contained a lot of “black holes” with no mention of “margins” and “promotional activities”. The market reacted by opening higher and then falling all the way until the close while selling continued into today’s session.

The concern is that Amazon.com’s margins may have been hurt while trying to boost its sales. The factors behind the higher shipment numbers may have more to do with tax savings, bad weather, comparison shopping and discounted prices. As a result, the actual impact of the higher top-line sales on bottom-line results remains to be seen.

So, how can investors bullish on Amazon.com participate in the stock’s upside without taking the risk of stock ownership. One way is to purchase long-term options called LEAPS or long-term equity anticipation securities. These options allow investors to purchase the rights to shares over one or two years time at a fraction of the cost of underlying stock ownership.

Currently, investors can purchase $40 January 2011 LEAPS call for just $21.85 per contract compared to $49.50 per regular share. As a result, investors can spend $2,185 for the right to buy 100 shares anytime during the next 753 days versus spending $4,950 to purchase 100 shares of the underlying stock. Investors looking for a lower breakeven and shorter timeframe can also look at the January 2010 calls.

See “Using LEAPS as a Stock Substitute” for more information or check out our Tools & Products section to find more ways to profit using LEAPS.