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2012 has been a phenomenal year for
Amazon.com(AMZN - Get Report) shareholders. Since the first trading day of January, the $113 billion firm has climbed more than 38%, besting the S&P 500 by a pretty huge margin.
That relative strength has caught hedge funds' attention too. Funds bought $3.7 million shares of the Seattle-based firm last quarter, adding more than $1 billion to the market value of their Amazon.com holdings.
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Amazon is the biggest online retailer in the world, bringing in around 7% of global e-commerce volume. That huge volume comes at a price, though, and in Amazon's case, that price is exceptionally low margins. As more and more products become commoditized, scale is the sole thing that matters for retailers -- the more costs that can be spread across a wider footprint, the more viable a firm's profitability becomes. Because Amazon already has the scale in its favor, few firms are going to be able to compete on cost.
To counter those low margins, Amazon has entered the device market, carving big inroads with its wildly Kindle devices. Much like the cell phone business, Amazon eats some of the upfront costs of the Kindle knowing that consumers will drive sales to fill their devices with content. But there are some big differences between the cellular business and online retailing, and AMZN doesn't earn the types of returns that mobile carriers can, and the breakeven isn't as quick or lucrative as many investors are pricing in.
While Amazon is the stalwart name in the online retail business, it doesn't have the same bargain valuation that the other hedge fund favorites do - for a relative strength trade, AMZN is a solid option, otherwise look to another name.
To see these stocks in action, check out the at
Hedge Funds' Favorite Stocks Q2 portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.