Polen Capital, a Florida-based investment management firm, doesn’t own any shares of Amazon.com, Inc. (NASDAQ:AMZN). The investment firm sold its stake in Amazon in 2010 because the biggest online retailer failed to meet Polen Capital’s “hurdles for investment.” In this article, we’re going to find an answer to why Polen Capital doesn’t own Amazon – the most common question that the firm gets.
In its Q4 letter to investors (you can download a copy here), Polen Capital said its performance, on a relative basis, was “negatively impacted by not owning Apple or Amazon during the past year.” Together, these two technology companies added nearly 500 basis points to the Russell 1000 Growth Index return in 2017. Besides Amazon, Polen Capital also doesn’t own Apple.
We have owned both companies in the past, but neither is among our top 20 ideas for the portfolio today. We believe that concentrating in our best ideas will produce strong absolute and relative performance over time and we do not feel the need to own any particular company regardless of how large a weight it is in the Indices, the firm said in the letter.
Answering the question that why it doesn’t own Amazon, Polen Capital said:
We sold Amazon in 2010 when the company no longer met our high hurdles (we call them guardrails) for investment. We require companies to have strong balance sheets, excess free cash flow, returns on equity above 20%, stable to increasing profit margins and real organic revenue growth. Beginning in 2010 and continuing through today, Amazon has been investing very heavily in its business, which has driven down free cash flow, margins and returns well below our thresholds. That isn’t to say that Amazon isn’t a great business. In fact, it may be the most competitively advantaged business in the United States that we don’t own.
Amazon’s current investing framework, though, continues to make its long-term free cash flow profile difficult to understand. Our aim is to assemble a portfolio that can generate mid-teens earnings per share growth, leading to mid-teens investment returns while taking less risk. We think the easiest way to accomplish that goal is by staying within our tried-and-true guardrails and do not feel the need to bend those guardrails to own Amazon today. That said, we study Amazon as closely as any other great business because it may one day meet our guardrails again, and even if it does not, it will likely compete with and allow us to better understand those companies that do meet our guardrails.
Amazon.com, Inc. (NASDAQ:AMZN) is a $675-billion market cap e-commerce and cloud computing company based in Seattle, Washington. It is the largest online retailer in the world in terms of revenue and market capitalization, and the second-largest after Alibaba Group in terms of total sales.’
Many investors believe that Amazon’s free cash flow isn’t moving in the right direction. For the trailing 12 months ended September 30, 2017, the tech giant reported free cash flow of $8.1 billion, versus $9.0 billion for the trailing 12 months ended September 30, 2016. Free cash flow less lease principal repayments was $3.5 billion for the trailing twelve months, versus $5.3 billion for the trailing twelve months ended September 30, 2016. Free cash flow less finance lease principal repayments and assets acquired under capital leases dropped to an outflow of $1.0 billion for the trailing twelve months, versus an inflow of $3.8 billion for the trailing twelve months ended September 30, 2016, according to the company’s Q3 earnings report.
Meanwhile, for the third quarter ended September 30, Amazon had net sales of $43.7 billion, versus $42.14 billion as expected by the market. The online retailing giant reported net income of $256 million, or $0.52 per share, for the third quarter, versus net income of $252 million, or $0.52 per share, for the quarter of 2016.
Shares of Amazon are up nearly 20% so far this year. Over the last 12 months, the stock has surged 67.76%. The online retailer trades with a trailing P/E ratio of 353.89x.
Meanwhile, Amazon is one of the most popular stocks among other active manager and hedge funds. There were 133 funds in our database with bullish positions in the online retailing giant.