Is Amazon.com (AMZN) A Smart Long-Term Buy?

·4 min read

Madison Funds, an investment management firm, published its “Madison Investors Fund” third-quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio return of 0.07% was recorded by the fund’s Class Y shares for the third quarter of 2021, with an 11.86% gain on a year-to-date basis, compared to the S&P 500 Index's gains of 0.58%, for the third quarter and 15.92% year-to-date (YTD). You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.

Madison Funds, in its Q3 2021 investor letter, mentioned Amazon.com, Inc. (NASDAQ: AMZN) and discussed its stance on the firm. Amazon.com, Inc. is a Seattle, Washington-based e-commerce company with a $1.7 trillion market capitalization. AMZN delivered a 5.31% return since the beginning of the year, while its 12-month returns are up by 7.69%. The stock closed at $3,444.15 per share on October 19, 2021.

Here is what Madison Funds has to say about Amazon.com, Inc. in its Q3 2021 investor letter:

"We did add a modest new position weight to the portfolio in the quarter in Amazon.com, Inc. stock (AMZN). We acknowledge that many aspects of Amazon’s merit as an investment are well appreciated. However, our work leads us to conclude that shares are attractive. Leadership positions in both e-commerce and cloud computing provide the company with significant durable competitive advantages in industries that we think can produce above average growth over the next decade. Over the past year, AMZN shares have trailed the market as investors debate near-term growth prospects following the pandemic-induced e-commerce demand. Additionally, margins have been depressed due to Amazon’s unprecedented increases in spending to build out fulfillment and in-house logistics capabilities - Amazon will build out more square footage this year and last than it did cumulatively over the previous 10 years, more than doubling its in-house delivery capacity. We like the investments Amazon is making and believe they will further advantage the company relative to other retailers, making it nearly impossible for competitors to match the same level of delivery speed and convenience. With its large and frequently engaged customer base, Amazon has multiple mechanisms to make money, including selling advertising and enhanced subscription services. Within the cloud business, we forecast Amazon Web Services (AWS) leveraging its strengths in Infrastructure-as-a-service (IaaS) to move into higher value segments of cloud computing (such as platform-as-a-service: PaaS), allowing the company to continue outgrowing the overall IT sector with strong profitability. While Amazon shares have performed extremely well over the long-term, we think near-term concerns about whether Amazon will earn a return on its accelerated investments provide an opportunity now for investors willing to look through the investment period. Our view is that the investments likely earn strong returns and extend Amazon’s competitive advantages and aboveaverage growth."

Amazon
Amazon

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Based on our calculations, Amazon.com, Inc. (NASDAQ: AMZN) tops our list of the 30 Most Popular Stocks Among Hedge Funds. AMZN was in 271 hedge fund portfolios at the end of the first half of 2021, compared to 243 funds in the previous quarter. Amazon.com, Inc. (NASDAQ: AMZN) delivered a -4.33% return in the past 3 months.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

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Disclosure: None. This article is originally published at Insider Monkey.

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