Amazon.com, Inc. (NASDAQ:AMZN) was downgraded by Evercore ISI due to valuation concerns. “”We’re reducing our Amazon rating to HOLD from BUY as shares now trade within a close range of our $460 target. While retail and Amazon Web Services (AWS) trends appear on track and N/T operating margins seemed poised for upside this quarter and next, our reduced rating recognizes the strong run in shares, now up 45% YTD, and the growing capital investment we are seeing through leasing activity, making modeling upside on the basis of FCF increasingly difficult” Evercore’s Ken Sena wrote.
“As we look back historically, we find the use of capital leases in place of standard Capex has steadily grown–from 1/3 of total capital investment (Capex + PP&E Acq. under Capital Leases) in 1Q13 ($340m) to over 1/2 in 1Q15 ($954m). While we understand the rationale here, as Amazon takes advantage of a low interest rate environment, it nevertheless masks the true capital intensity of the business when considering standard FCF measures as cash payments are spread out and flow through financing activities (as opposed to Capex through investing activities) on the C/F,” Ken Sena said about the online retailer.
We should note that Amazon shares were trading below $300 in January and delivered more than a 50% gain since those lows. Hedge funds also saw the opportunity in Amazon shares in Q1 and increased their holdings significantly. Amazon.com, Inc. (NASDAQ:AMZN) was in 96 hedge funds’ portfolio at the end of the first quarter of 2015. There were 76 hedge funds in our database with AMZN holdings at the end of the previous quarter. Usually we don’t see this kind of sharp increases in hedge fund sentiment towards mega-cap stocks.
Why do we pay attention to hedge fund sentiment. Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research have shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return more than 145% over the last 34 months and outperformed the S&P 500 Index by 85 percentage points (see the details here).
Let’s now check out the key hedge fund action encompassing Amazon.com, Inc. (NASDAQ:AMZN).