Key Points
- Asset managers are increasingly adjusting their portfolios towards companies with sustainable business models, and reasonable valuations.
- Both Amazon and Suncor, for now, offer businesses that have sustainable competitive advantages and steady cash flow.
- Investors looking to invest over the long term could consider these stocks.
Institutional Investors have been caught by high levels of volatility in the first-half of the trading year, and many have had to quickly re-assess their trading strategies. Moving away from high-flying growth stocks, to a much more balanced portfolio after many equity funds faced downturns and shutdowns from excessively speculative positions. Investors are now focusing on stocks that have competitive and sustainable business models, and have long-term potential.
Amazon and Suncor are two stocks such stocks that have been getting institutional attention in recent times. While Amazon is down 38% from its 52-week high, and, Suncor is down 24% for the year, both are being increasingly favored by institutional ownership. Amazon currently has 59% institutional ownership, and Suncor currently has 62% institutional ownership.
Amazon (NASDAQ: AMZN), is down a lot more than the broader market, partially due to the excess valuations, and partially due to the overall volatility of the tech sector. Revenue came in 9.6% higher during the latest quarter, as global consumer spending continued to weigh on the stock. But consumer sentiment is once again on the rise, and while savings have taken a hit, and consumers are increasingly holding back on purchases due to inflation, basic consumer goods, may start to witness a tiny bounceback as we head forward.
In addition to the retail sentiment, Amazon’s cloud business continues to go from strength to strength. The wide net that AWS has cast, means that it is increasingly becoming central to the $200 billion dollar cloud market. Amazon and Microsoft both control over 50% of the current market share between the two of them, albeit slightly lower than previously, years mainly owing to new entrants who provide highly specialized services. Since the cloud industry is expected to grow by over 30% in 2023, expect Amazon’s AWS revenue to grow at a similar pace. AWS is on track for $70 billion-plus revenue, and considering that the cloud profit margins have been steadily growing increasing from 29% in 2021 to 35% in 2022, means that the stock is unlikely to stay down for long, especially as cash flow ramps up.
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Amazon continues to expand globally and has become increasingly a key part of local markets in many developing countries such as Turkey, Australia, Mexico, Brazil, and India, where it retains significant market share and has ample opportunity to grow. While the retail segment will remain a relatively low-margin business, the growth of the global e-commerce market, combined with Amazon’s 13-14% market share, will translate into double-digit revenue growth for a while. Furthermore, retail revenues will increase as capital intensity decreases, from improved logistical synergies, and economies of scale. This should improve overall margins, allowing Amazon to get to a place where it has consistent cash flow, despite being an overall capital-intensive business.
Suncor (NYSE: SU) continues to see strong results, as higher oil prices result in improved cash flow for the Montreal-based, integrated oil company. Cash flow from operating activities doubled during the latest quarter, and with oil prices heading back up again, institutional investors are closely looking at the stock. After facing years of tepid results, the sudden increase in profits has pushed the valuation down significantly, with the latest price-to-earnings coming in at 6x.
Considering there is an increasing shortage of oil, primarily due to OPEC cutting down on production, prices could be heading back above $100 per barrel, and since most oil companies had hedges around $70-75 per barrel, until recently, higher prices should lead to improved price realizations in the coming quarters. This should only aid in improving margins and cash flow as we move into the last quarter. And while a deflationary scenario is on the horizon, oil production is unlikely to be ramped up in the near future, leading to a fall in oil reserves. Therefore, Suncor is well set to take advantage of market dynamics and is likely to see significant gains as the broader market stabilizes.
Companies in This Article:
| Company | Current Price | Price Change | Dividend Yield | P/E Ratio | Consensus Rating | Consensus Price Target |
|---|
| Amazon.com (AMZN) | $198.70 | -2.1% | N/A | 42.55 | Moderate Buy | $235.77 |
| Suncor Energy (SU) | $41.10 | +0.7% | 4.09% | 8.95 | Moderate Buy | $56.40 |
