Is Longtime Amazon.com Bull Miller Converting to Worry Mode?

Did one of the longest-running Amazon.com (AMZN) bulls just get cold feet?

In the second quarter, Bill Miller sold the online retailer's stock out of his eight-month-old (LMOPX)Legg Mason Opportunity fund, according to paperwork filed with regulators Monday. At the same time, he bought a slew of Amazon.com's convertible bonds.

The move by the high-profile stock-picker, whose (LMVTX)Legg Mason Value is the only fund to beat the S&P 500 each year since 1991, raises eyebrows because Miller has been a staunch Amazon advocate for years. An indication that Miller may be wavering on Amazon certainly wouldn't help its beleaguered stock.

Miller didn't remove Amazon.com from Legg Mason Value, where it accounted for 2.7% of the fund's assets on June 30, according to a shareholder report filed Tuesday. That's up from 1.7% on April 30, according to Morningstar. But his comments in the Opportunity fund report imply that, while he believes in the company's long-term prospects, he doesn't necessarily think the stock is a winner in the short term.

The move to convertibles bears this out. "It's a defensive way to be involved in a stock," says John Calamos, co-manager of (CCVIX)Calamos Convertible fund. "I've seen people do this. They say, 'Gee, I'm not as enthusiastic about this stock as I might be with others, but I'm afraid not to be in it.' "

Convertible bonds, or "converts," are part bond, part stock. Like bonds they offer steady interest payments, but they also give investors the option of getting their initial investment in cash or a set number of shares of the issuer's stock at maturity.

For many investors, converts are a way to invest in stocks with less risk. When the bond is issued, the stock price you'll get if you convert is usually about 20% to 25% above its current price. If the stock is above that price when the bond matures, you can get the stock at a discount. If the stock tanks and the bond's price drops too, you still get your principal and the interest payments at maturity.

Amazon's Fall Amazon.com shares have tanked this year, but they didn't slow down Miller's newest fund.
Amazon.com	Legg Mason Opportunity	S&P 500
-54.2%	11.6%	1.5%
Source: Morningstar. Performance through Aug. 14.

On Tuesday, Amazon.com shares traded at 37 1/8, far below their 52-week high of 113 and down 54% so far this year. Legg Mason didn't return a call for comment, but Miller appears to be making a defensive bet on the stock: If its shares rouse from their doldrums over the next eight years he could have a bargain, but if they stay down the fund will still get its interest payments and its principal, as long as the company doesn't default on its payments.

"Our position in the convertible bond just requires that they be in business and solvent over the next eight years for us to make money. If it turns out that the stock does well, we will participate through the convertibility feature," Miller writes in his Opportunity fund report. In the report he acknowledges that the fund realized a loss on the Amazon shares the fund sold, which makes sense since the fund started at the end of last year and the stock has tanked this year.

The Amazon.com convertible bond made up 3.5% of the Opportunity fund's assets on June 30. The stock was 1.2% of the fund as of March 31.

Despite the company's solid brand and broad appeal, many professional money managers -- including those who shop on the site regularly -- have tired of the company's refusal to set a profitability target and dumped the stock. At the end of the first quarter more than 1,000 growth funds owned Amazon.com shares, according to Morningstar; by June 30, that figure was down to 223.

Calamos, the convertible-bond specialist, says he's made money from Amazon.com this year by shorting the stock and buying its convertible bond. Shorting, or short-selling, is a way to make money from a falling stock that involves selling borrowed shares in the hopes of buying them back for a lower price later.

Miller's comments indicate he's still bullish on Amazon.com -- keep in mind the stock was still in his Value fund -- even if his competitors have put the stock in the penalty box.

"(Amazon.com) shares fell sharply because second-quarter revenues were below some analysts' expectations, and because of concerns about the company's financial position. We were quite pleased with the improvements in productivity evident in the quarter. I think the issues surrounding Amazon's financial condition reflect either a poor understanding of the company's financial model or excessively pessimistic assumptions about the growth of consumer online commerce," Miller writes in his report.

As a firm, Legg Mason upped its Amazon.com stake in the second quarter, according to institutional stock ownership tracker bigdough.com. Legg Mason is the second largest institutional owner of Amazon.com, with more than $530 million invested in the company as of June 30. Denver growth shop Janus Capital is far and away the largest holder of the shares, with more than $1.1 billion sunk into the sinking stock at the end of June.

Miller's bullishness on Amazon.com doesn't carry over into the whole tech sector. He has shorted the tech-heavy Nasdaq 100 (QQQ) in his Opportunity fund -- essentially a bet that big-cap tech stocks will fall. And his recent comments indicate he's seeing undervalued opportunities in nontech sectors.

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