With the economy starting to reopen, the stock of e-commerce giant Amazon.com (AMZN -1.35%) is, dare I say, hated by investors.
While many think of Amazon as a huge pandemic winner, the stock is down below the levels first set last August -- nearly 10 months ago. And that's in spite of blockbuster earnings results in April. Clearly, investors are wary about Amazon's potential performance as people leave their homes.
Yet one of the most famous value investors in the world -- one who has been dead right on Amazon stock over the past decade -- just reloaded his long-term Amazon bet. Not only that, but he even leveraged that bet with call options.
Who's afraid of the big bad reopening? Not Bill Miller
Bill Miller is a legendary value investor with one of the best all-time investing track records. However, unlike some other dyed-in-the-wool value investors, he also has a hankering for disruptive technology and high-growth compounders.
In the fourth quarter of 2020, Amazon stock accounted for 3.9% of the Miller Value Partners portfolio, good for the fourth largest allocation in the fund. During the first quarter, Miller trimmed that stake by a negligible amount, lowering the share allocation to 3.15% of the portfolio. However, in conjunction with that move, Miller bought a hefty amount of Amazon call options, with an underlying share count of 63,300 shares, which would imply an additional 5.11% stake. That could imply an 8.26% total allocation to Amazon -- the largest allocation in the portfolio and nearly double the amount of his next largest holding.
A call option gives the owner the right to buy 100 shares of stock at a certain price by a certain time. If, by the time of expiration, the stock is below the strike price, the option expires worthless. If the stock goes up by a lot, however, one can make a lot more profit for the amount of capital deployed. Therefore, buying a call option is akin to making a leveraged bet on a stock.
Needless to say, Miller just made a very bullish bet on Amazon, at a time when it's out of fashion on Wall Street.
Why is Miller so bullish as the economy reopens?
Miller recently spoke with Barron's magazine, in which he discussed his Amazon position, among other holdings. In Miller's mind, while investors tend to focus on the retail business, he thinks Amazon's two highest-margin businesses, Amazon Web Services and the digital advertising business, could account for almost all of Amazon's value in a couple of years. That essentially means you're getting the world's leading e-commerce retail platform for free.
In addition, Miller sees opportunity in Amazon's relatively new business-to-business platform, as well as the owned logistics platform it will open up to third parties post-pandemic -- and he believes that isn't even in the price yet:
They're building airplanes and have ordered 100,000 electric delivery vans. ... Amazon is building capacity because they want to be able to handle all of their own volume. But then they're going to build excess capacity, which they can sell. Obviously, their economics will become very different for their internal stuff, because all of that cost will be spread over a much wider base. And that business isn't even in the price yet.
He'd put how much of his net worth in it?
We don't know exactly how long-dated Miller's Amazon options are, or what the strike price is, but it's clear Miller is still very bullish on the stock. In fact, when asked by Barron's how much he'd recommend investors put into Amazon, he said 20% to 30% of their portfolios:
There's very little risk. If the antitrust laws change and the mood of the country changes and they go after Amazon and split it up, great! Then it's worth a lot more.
Obviously, we here at the Fool preach the virtues of portfolio diversification, and buying at least 10-15 stocks, but there is also a risk of overdiversification, in which investors spread their bets too thin across less-great ideas, which can lower returns. Yes, 20%-30% is a lot to put into one stock, but if one were to bet that much on a stock, one of the best choices is a recession-resistant large cap with limited downside. I would put Amazon in that category.
So while many are looking to "reopening" plays today, investors shouldn't forget about Amazon. While the near-term movements of stocks are impossible to predict, the stock hasn't moved for quite a while, so it may be due for another leg higher.