Polen Capital, an investment management firm, published its “Polen Focus Growth” first quarter 2021 investor letter – a copy of which can be downloaded here. A return of 1.81% was delivered by the fund for the Q1 of 2021, outperforming its Russell 1000 Growth benchmark that delivered a 0.95% return, but below the S&P 500 Index that had a 6.18% gain for the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Polen Focus Growth Fund, in its Q1 2021 investor letter, mentioned Amazon.com, Inc. (NASDAQ: AMZN), and shared their insights on the company. Amazon.com, Inc. is a Seattle, Washington-based e-commerce company that currently has a $1.5 trillion market capitalization. Since the beginning of the year, AMZN delivered a -2.93% return, while its 12-month gains are up by 31.19%. As of May 13, 2021, the stock closed at $3,161.47 per share.
Here is what Polen Focus Growth Fund has to say about Amazon.com, Inc. in its Q1 2021 investor letter:
“We purchased Amazon in February 2021, which accounts for 5% of the Portfolio’s weighting. For most of the last decade, Amazon did not meet our guardrails. We also did not have enough visibility into future free cash flow margins to indicate that the company would sustainably meet our guardrails and, relatedly, if valuation supported the double-digit annualized returns we seek. We now believe we have that visibility.
In 2008, almost all of Amazon’s revenue and operating profits came from its e-commerce business. Amazon Prime and Amazon Web Services (AWS) were new and relatively small back then. The company had roughly 5% operating profit margins overall, entirely from the e-commerce business. In 2009, the company began harvesting its retail business profits to accelerate investment in its distribution and logistics infrastructure globally and very heavily build out and scale AWS data centers. The company’s return on equity began to decline at that time and turned negative for three full years from mid-2012 to mid-2015 (margins and free cash flow declined similarly). So, beginning in 2010 and continuing to mid-2018, Amazon’s business was outside our guardrails. We chose to stick to our guardrails and not own Amazon.
Amazon’s profit drivers have changed quite dramatically over the years. Starting in the back half of 2018, Amazon came back above our hurdles. Revenue generation overcame ongoing heavy investments in areas such as delivery infrastructure, data center infrastructure, and shipping.
Our research suggests that today, after considering cost allocation, Amazon’s underlying profit drivers from higher-margin AWS and Advertising could grow much faster than its low-margin e-commerce business (excluding Prime), its historical driver of revenues and operating profits.
Amazon Prime, AWS, and Advertising together account for only about 20% of revenue today, but we believe over 150% of operating profits. Looking forward, growth higher-margin businesses means Amazon’s total margins and profit dollars could rise quite dramatically.
It is important to note that Amazon proved to be an exception to our guardrails. Based on our experience, very few companies that remain outside our guardrails for an extended period operate from a position of competitive strength but rather, from a position of competitive pressure. Today, we feel we have better visibility into the future earnings growth and margins from AWS and Advertising and believe these could drive 30%+ annual earnings growth for the next five years. Even with significant P/E multiple compression, we would still expect double-digit investment returns.”
Our calculations show that Amazon.com, Inc. (NASDAQ: AMZN) ranks 1st in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, Amazon.com, Inc. was in 273 hedge fund portfolios, compared to 245 funds in the third quarter. AMZN delivered a -3.55% return in the past 3 months.
The top 10 stocks among hedge funds returned 231.2% between 2015 and 2020, and outperformed the S&P 500 Index ETFs by more than 126 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Here you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
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