A Difference in TermsIn his notes, Underwood applauds Amazon as a "viable and profitable business" but raises several red flags about the company's prospects. Among the key concerns: valuation, $2.3 billion in debt, online and offline competition from rivals such as eBay ( EBAY) and Wal-Mart ( WMT), which have better capital structures and consistent profits, and the difficulty in predicting long-term growth rates. "We would not use AMZN shares as a way to play a strong retail season or a further expected increase in e-commerce share prices," Underwood wrote in a Dec. 2 note. The analyst didn't return calls for comment. The difference of opinion within Legg Mason is one of short term vs. long term, says Nancy Dennin, a portfolio manager at Legg Mason Value Trust. "Analysts are very short-term focused," looking at current fundamentals to determine what a stock is worth, Dennin says. "It's had a huge run this year; hold is probably a fair rating in the short term." Dennin says she and Miller are still very bullish in the long term on Amazon. While echoing Miller's recent comments that the bull market has returned and that Oct. 9 was most likely the market low, she adds, "A scarce resource is outsize growth -- Amazon has that." She believes that Amazon's return on capital will accelerate dramatically and that Legg Mason "is very reluctant to sell stocks that have improving economics."
Lessons From AOLMiller has been known to take large bets on individuals companies, including some that fall outside the traditional definition of value -- sometimes getting burned on the back end when the stocks fall back to earth. AOL ( AOL), for instance, ballooned to 25% of Legg Mason Value Trust's assets before the shares started their long slide in 2000. As AOL, Dell, Gateway and other big-tech gambles tumbled, the fund couldn't sell the shares fast enough to avoid the downdraft. Meantime, the massive selling spurred huge capital-gains tax distributions.
|A Legg Up on Amazon.com |
Four Legg Mason funds have sizable stakes in the online retailer
|Fund||Total Shares||Percentage of Fund's Assets|
|Legg Mason Focus Trust||650,000||11.99% (No. 2 holding in fund)|
|Legg Mason Opportunity Trust||6.1 million||7.85 (No. 1 holding)|
|Legg Mason Value||30.2 million||6.06 (No. 4)|
|Legg Mason Special Investment||5.5 million||4.73 (No. 4)|
|Source: Lionshares.com, Legg Mason. Data through Sept. 30.|
Miller Has Company
|Amazon in the Cart |
The three biggest holders of Amazon.com own more than 50% of the company
|1. Jeff Bezos, Chairman, CEO||29.29%|
|2. Legg Mason Fund Advisors||16.58|
|3. Janus Capital Management||6.35|
|Source: Lionshares, data through Sept. 30|
|Coming Back to Amazon |
As Amazon.com starts eking out operating profits, fund managers are returning. The stock now turns up in about 7% of all large-cap funds.