The RiverPark Large Growth Fund is bullish on Amazon.com, Inc. (NASDAQ: AMZN). The fund, which recently released its Q2’18 Investor Letter, says that the online retailing giant continues to post impressive results in its core business segments and innovate in new markets such as video content, digital marketing, last mile delivery, the Echo/Alexa platform and, the $3-trillion healthcare market. The fund believes that Amazon has exceptional potential for sales and profit growth. Let’s take a look at the fund’s comments about Amazon.
AMZN shares advanced 17% for the quarter after reporting extremely strong first quarter results. For the quarter, sales increased an impressive 43% to $51 billion, an acceleration from the fourth quarter’s 38% year-over-year growth, while operating income increased 92% year-over-year (also an acceleration from the fourth quarter) and net income more than doubled to $1.9 billion. The company’s results were impressive across both its consumer franchise and its web services divisions. In its North America retail division, the company reported sales of $31 billion (for year-over-year growth of 46%) and 93% operating income growth. International retail also posted accelerating results with year-over-year revenue growth of 34% to $15 billion for the quarter. The company’s Amazon Web Services division was again a standout as it experienced another acceleration of growth to 49% year-over-year with operating margins of 25.7% (an increase of 140 basis points year-over-year). While Amazon continues to invest heavily to drive its market leading positions in each of its businesses and in all geographic regions, the company also continues to grow operating income faster than its strong sales growth. Additionally, management also provided better-than-expected second quarter guidance of 34%- 42% revenue growth and 75%-100% operating income growth.
In addition to posting impressive results in its core business segments, AMZN continues to innovate in new markets such as video content, digital marketing, last mile delivery, private label, the Echo/Alexa platform and, more recently, the $3 trillion healthcare market (via its partnership with J.P. Morgan and Berkshire Hathaway to lower the cost of covering employees and its $1 billion acquisition of online pharmacy PillPack). We believe that the sales and profit growth potential for the company remains exceptional and will lead to dramatic increases in excess free cash flow over the longer term.
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Shares of Amazon.com, Inc. (NASDAQ: AMZN) are up 62.12% since the beginning of this year. Over the past three months, the share price has jumped more 19%. Whereas, the stock has moved up more than 103 % over the past 12 months. AMZN has a consensus average target price of $2,127 and a consensus average recommendation of BUY, according to analysts polled by FactSet. On Monday, the stock was closed at $1,927.68.
Meanwhile, Amazon is a very popular stock among hedge funds tracked by Insider Monkey. As of the end of the second quarter of 2018, there were 137 funds in our database holding shares of the online retailer, including Taconic Capital, Antipodean Advisors, and Think Investments.
The writing was kind of on the wall at the end of March. S&P 500 Index was near the 4600 level whereas inflation rate was close to 8% and the 10-year Treasury yield jumped to 2.7%. The probability of further increases in interest rates and sharp declines in the stock market was much larger than the probability of further gains in stock prices. So, we started telling our premium subscribers to short the market at the end of March. Most hedge funds interpreted the macro developments the same way we did and reduced their exposure. The total value of stock holdings in hedge funds’ portfolios went down from $3.1 trillion at the end of December to $2.8 trillion at the end of March.
This isn’t a terribly large reduction in market exposure, but it is still a reduction. It still shows that hedge funds have a slight edge in market timing.
Insider Monkey has long been a believer of imitating the top stock picks of hedge funds, and this approach has helped us beat the market on average over the last several years.
Warren Buffett never mentions this but he is one of the first hedge fund managers who unlocked the secrets of successful stock market investing. He launched his hedge fund in 1956 with $105,100 in seed capital. Back then they weren’t called hedge funds, they were called “partnerships”. Warren Buffett took 25% of all returns in excess of 6 percent.
For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
As you can guess, Warren Buffett’s #1 wealth building strategy is to generate high returns in the 20% to 30% range.
We see several investors trying to strike it rich in options market by risking their entire savings. You can get rich by returning 20% per year and compounding that for several years. Warren Buffett has been investing and compounding for at least 65 years.
So, how did Warren Buffett manage to generate high returns and beat the market?
In a free sample issue of our monthly newsletter we analyzed Warren Buffett’s stock picks covering the 1999-2017 period and identified the best performing stocks in Warren Buffett’s portfolio. This is basically a recipe to generate better returns than Warren Buffett is achieving himself.
You can enter your email below to get our FREE report. In the same report you can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12-24 months. We initially share this idea in October 2018 and the stock already returned more than 150%. We still like this investment.
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