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is already

pushing roses and sappy books, but the online retailer sent Bill Miller's valentine early.

This morning Amazon

said it turned a fourth-quarter profit and that it expects to be operating cash-flow positive for 2002. The company's shares, which average a 45% loss over the past three years, rose some 23% on the news. Miller and his colleagues at Baltimore-based Legg Mason are no doubt cheered: They had made far and away the fund world's largest bet on the company.

The upshot: Miller might not be in the money on his Amazon shares, but his thesis that the company would be profitable appears to be starting down the road to Rightsville. That said, there is still plenty for he and the stock's newfound fans to worry about.

"This was a breakout, amazing quarter," says Lisa Rapuano, a member of Miller's team and the manager of the

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Legg Mason Special Investment Trust, which owns Amazon shares. "I don't want to get too optimistic, but I would've been thrilled with just 10% sales growth, and we got almost 15%."

Others agree, if less effusively.

"It was a really good quarter without a doubt, but I'm still not nearly as bullish as Bill Miller," says David Kathman, an Amazon analyst at Chicago research house Morningstar.

It's safe to say that no one outside of Amazon's walls is.

Miller's Value Trust fund alone owned more than 8% of on Sept. 30, the latest data available. A list of the five stock funds that own the most Amazon shares includes two other Legg Mason funds: Special Investment and Opportunity, which is also run by Miller. Miller is the only fund manager to beat the

S&P 500

in each of the last 11 years.

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Legg Mason's funds own some 65 million Amazon shares, according to Rapuano. That adds up to more than 17% of the company. For perspective, consider that Janus was the second-largest institutional Amazon shareholder at 3.5% on Sept. 30, according to the latest data available from, a Web site that tracks institutional stock ownership. Rapuano also says the firm holds convertible Amazon bonds worth some $260 million at face value.

Unlike many traditional, bargain-hunting value investors, Miller and his team eschew metrics such as

price-to-earnings ratios along with any pat phobia toward all things Internet. Rather, they troll the market's waters looking for battered companies that hold what they see as the potential for outsize cash flow from operations. Though Miller has misfired, his models have also led him to outsize gains from fat bets on then-unprofitable companies such as

America Online


when few value types would go near the stock. These picks, along with a healthy dose of more traditional fare such as

Waste Management


and HMO operator

UnitedHealth Group

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have fueled his

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Legg Mason Value Trust fund's index-beating streak.

Although's shares have fallen 80% and 31% in the past two calendar years, respectively, Miller and his gang have been buying. The firm's Amazon share balance has risen each quarter since Sept. 30, 1999, according to regulatory paperwork. Rapuano won't say what the firm's cost basis is on the stock, but she notes that the Opportunity and Special Investment funds started buying the stock when it traded in the low $30s, and kept buying as it fell into the mid-teens. She said the Value Trust fund began buying shares in the $50s and continued buying as they fell lower. Even after its impressive gain Tuesday, Amazon traded just north of $12.

Anatomy of a Believer
Legg Mason's stake has risen while the stock has fallen

Sources: and Legg Mason. Current share figure is an estimate.

The stock wasn't among the top 10 holdings of the Value Trust or Special Investment fund at the start of this month, but Amazon's bonds and shares constituted more than 7% of the Opportunity fund at that point.

Despite today's news, there are still plenty of questions about Amazon's future.

Morningstar's Kathman points out that Amazon benefited from a big currency hedging gain in the fourth quarter and says it's still hard to say how large the company can grow once its book, music and video sales efforts mature worldwide.

"The question for me is how big can they get?" he asks. "I've warmed up a bit to Amazon, but they've still got $2 billion in debt, which is a big thing hanging over them. I think they will survive, but there was a lot of talk about how they would be the Wal-Mart of the Internet. That has faded, but the potential size of the company will determine what they're eventually worth."

Rapuano says that in a likely scenario she's confident the stock is worth "at least $20." But she admits that she and her colleagues have lowered their expectations a bit over the past year.

"The basic change in our model over the past year is that we've toned down the long-term sales growth rate," she says. "The upside and downside estimates are gigantic and tiny because the unknown is sales growth."

While the fourth-quarter results aren't enough to clarify Amazon's long-term prospects, Morningstar's Kathman admits it has forced him "rejigger his model" for the company's growth. "It's still expensive for my taste, but not outrageous," he says.

Given Tuesday's flurry of buying, it seems that others agree. Fund managers who scoffed at Miller's foray and did their Christmas shopping on Amazon might start feeling pressure to put their shareholders' money where their mouse is.

Ian McDonald writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to, but he cannot give specific financial advice.