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Growth Funds Are Booking From Amazon.com's Stock

Ian McDonald

From the looks of things, Amazon.com(AMZN Quote) may be pretty high on a bestseller list that is nothing to boast about: the list of stocks that have seen large numbers of funds dump their stake.

During the second quarter, when the online bookseller's stock was getting shellacked to the tune of a 45% drop, fund managers piled out of Amazon.com, which posted a narrower-than-expected loss late Wednesday. At the end of this year's first quarter, 1,039 growth mutual funds owned Amazon.com shares. By the end of the second quarter that figure was down to 223, according to Morningstar.

Most fund managers' instincts -- and company policies -- keep them from telling the world what they're buying and selling. But sometimes they don't have to say a word. The numbers speak volumes about what the pros think of the online bookseller's near-term prospects.

The funds that were big Amazon.com holders as of their most recent reports, such as the Janus family, aren't talking about whether they still hold the stock. But managers who are out of the stock are weighing in, and they echo one another when asked why they sold: a lack of profits.

"They have a great brand and give customers a great experience. I buy a book there every week, but I don't want to own the stock," says Paul Meeks, manager of (MANTX Quote)Merrill Lynch Internet Strategies, who sold the stock in 1999's fourth quarter. "You want to see smaller loss, smaller loss, break-even. Now it's bigger loss, bigger loss, ask them when they'll make money and they say, 'We'll get back to you.' "

The company got back to the Street Wednesday, but, as expected, didn't show any signs of profitability. The company posted second-quarter revenue of $578 million, lower than the consensus estimate of $585 million. Amazon also posted a loss, excluding charges, of 33 cents a share, narrower than the expected 35 cents a share. (TSC reported earlier on the company's report.)

For fund managers, Amazon.com's glaring negatives have been outweighing the positives. The company has a great brand, a huge audience and a sturdy leadership position. But the company hasn't projected a profitability date, and has been the focus of many articles and reports raising questions about whether the company can ever post a profit. On Tuesday, Chief Operating Officer Joseph Galli bolted after just 12 months of work. Its shares have fallen more than 50% this year, and faced added downward pressure Wednesday amid a Lehman Brothers downgrade.

Since mutual fund holding data is typically a few months old, it's impossible to say without a doubt which funds are still holding shares. Here's a list of the 10 funds with the biggest percentage of their assets invested in Amazon.com as of their most recent public portfolio report.

Among institutional investors, Janus was far and away the most smitten at the end of the first quarter, according to bigdough.com, a Web site that tracks institutional stock ownership.

On March 31, the top-selling Denver-based growth shop owned a whopping 9.2% of the company's sagging shares. That's more than three times the amount owned by runner-up Lincoln Capital Management (that firm's ownership data is as of the end of June). Of course, those holdings may have changed substantially since reporting time.

Six of the funds that owned the most shares at the end of the first quarter had a Janus label, including the $17 billion (JAMRX Quote)Janus Mercury fund and the $34.3 billion (JAVLX Quote)Janus Twenty fund, which owned nearly 4% of the company between them at the end of the first quarter. The stock didn't add up to a massive position in either fund due to their vast asset base.

The firm won't comment on specific stocks, so there's no way to confirm that it was among the sellers, though Twenty manager Scott Schoelzel did reduce his position in the first quarter, according to Morningstar.

Legg Mason Value manager Bill Miller won't talk about the stock either, though he has championed it publicly in the past and owned shares in Value Trust and Legg Mason Opportunity on March 31. A Legg Mason spokeswoman confirms that he still owns the stock.

Alan Loewenstein, co-manager of (NTTFX Quote)John Hancock Technology fund, says he and his colleagues soured on the stock because it shows no signs of turning a profit, selling their position a year ago.

"When they started saying they don't know when profitability will come, that's when we said we'd look at it when they cleared that up," he says.

"They have to prove to the Street that they can be profitable," said Alex Cheung through a spokesperson. Cheung recently dropped the reins of (MFITX Quote)Monument Internet, last year's top Net fund and started his own shop, Long Bow Capital Management.

These concerns mark a seismic shift for investors in Net stocks. Meeks and others note that just last year investors had no problem with plowing money into unprofitable dot-coms spending aggressively to build market share and brand awareness. Now it's a different story.

"A couple of years ago it was the Wild West. You could lose money as long as you staked your claim by gaining [brand awareness]," says Meeks. "But no one's buying that line anymore," he says. Today, he focuses on companies that are at least targeting profitability in the near term.

Beyond continued losses, pros polled on Amazon.com say Galli's unexpected departure set off alarm bells and Chief Executive Jeff Bezos' "arrogant" refusal to adjust his strategy to slacken spending and bring profitability closer has annoyed fund managers.

Meanwhile, one of the few funds making money on the stock might be (MGBBX Quote)Montgomery Global Long Short, which has shorted the stock. Shorting is a bet that a company's share price will tumble.

Montgomery won't talk about its apparently profitable position, merely confirming that the stock is still shorted in the fund's portfolio.