Value Funds Still Not Dipping a Toe Into Amazon

Amazon.com (AMZN) is still on the road to break-even, but the number of growth-fund managers aboard its wagon has dwindled sharply.

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After the market closed Monday, Amazon told a good-news, bad-news story. The good news was that it met Wall Street analysts' forecasts and still thinks it will break even for the first time by this year's fourth quarter. But the company also agreed to sell AOL Time Warner (AOL) $100 million worth of Amazon's shares, down more than 58% over the past 12 months, at a discount. Plus, the company slashed its growth targets for the second half of the year, sending its shares plummeting in after-hours trading.

Although value legend Bill Miller, manager of the (LMVTX)Legg Mason Value Trust, is a public and vocal Amazon fan, the number of growth managers owning Amazon.com's shares is half of what it was at the end of 1999, prior to its 80% loss last year. Meanwhile, other value players haven't started buying the stock.

Half.com

At the start of last year, nearly 15% of growth funds owned Amazon's shares. But as the company consistently chose expansion over profitability, growth managers hit the exits and shares tumbled. At the end of last month, just 7% of growth funds held Amazon.com.

A Shrinking Fan Base Growth managers have become less jazzed about owning Amazon.com

Source: Morningstar.

"I've heard expressions of concern from several managers," says Scott Cooley, a senior fund analyst at Chicago fund-tracker Morningstar. "We know it can work in books, but we don't know how it will work elsewhere.

"For a while they were touting their garden tools," Cooley continues. "I can remember managers making fun of that."

Indeed, many managers privately admit they're loyal Amazon customers, but they are reluctant to buy its stock until the company silences balance-sheet concerns by turning a profit. Amerindo Investment Advisors was among the largest holders of Amazon.com shares a year ago, but this month Chief Investment Officer Matthew Fitzmaurice told TheStreet.com that he and his colleagues are "unclear as to whether [founder and CEO] Jeff Bezos' way of running the business was closely aligned with what Wall Street wanted."

Translation: Fund managers aren't going to like the stock until the company starts making money.

That said, it's easy to see why the company had a following. After all, in 1998 its shares rose an eye-popping 966%, compared with 28.6% for the S&P 500 .

Streaky Amazon.com's shares have been a feast or famine proposition
	AMZN	S&P 500
YTD Return	9.0%	-7.7%
2000	-80.0	-9.1
1999	42.0	21.0
1998	966	28.6
Source: Morningstar.

Despite fund managers' current disaffection for Amazon's stock, Legg Mason's Miller, the only fund manager to top the S&P 500 in each of the past 10 years, continues to hold Amazon. Miller, often likened to former Fidelity legend Peter Lynch, had more than 3% of his flagship fund's assets in Amazon shares at the end of June. His firm was the top institutional holder of Amazon, owning more than 14% of the company at the end of March, which is the most recent holdings data available from Lionshares.com.

Best Case, Worst Case

At the end of last month, Miller told journalists at the Morningstar Investment Conference in Chicago that he valued Amazon at $30 a share. In the best-case scenario it was worth $100 and in the worst-case scenario it was worth $12, he said.

"Clearly, if you're betting against Bill Miller, most of the time you'll be wrong," says Morningstar's Cooley. "But he's had a few weak picks in the past, and there are a lot of other value managers who, as far as we know, haven't bought the stock."

The percentage of big-cap value funds owning Amazon hasn't budged from just 1% since the start of last year, according to Morningstar.

It seems the only certainty about Amazon is that it will be a stock that makes managers either heroes or goats. The good news for most fund investors is that they aren't along for what's sure to be a rough ride.

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