Amazon.com at crossroads

Your Money

March 11, 2007|By Andrew Leckey | Andrew Leckey,Tribune Media Services

Is there hope for my shares of Amazon.com Inc.? I wonder about that company.

-- L.R., via the Internet

As it accepts a flood of preorders for Harry Potter and the Deathly Hallows, the final installment of the famous series due out at midnight July 21, the aggressive Internet retailer itself could benefit from a little magic.

It offers an innovative array of new merchandise that has expanded far beyond books, music and videos. Yet there's no crystal-ball answer as to whether that can be transformed into long-term growth and profitability, or whether cut-rate shipping and hefty technology expenditures will be too costly to maintain.

Shares of Amazon.com Inc. (AMZN) are down about 2 percent this year after a decline of 16 percent last year.

In customer satisfaction Amazon.com is surpassed only by the BarnesAndNoble.com site among retailers and service providers, according to the University of Michigan's American Customer Satisfaction Index survey for 2006. On a 100-point scale it scored 87 versus 88 received by BarnesAndNoble.com.

Promotions such as a reduced-price Xbox 360 helped propel the firm to No. 1 in online retail sales during the holiday season, according to ComScore Networks Inc. research. Quarterly sales increased 34 percent in the fourth quarter but profits fell 51 percent, due in part to higher taxes.

Amazon.com is a prolific spender with a lot of debt and profit margins that appear to have reached a limit. Some of its products such as groceries and toys are not sure things.

Its new Web site Endless.com features handbags and shoes with free overnight shipping.

It has been expanding its Askville.com research site, in which its users supply questions and answers.

Through the new Amazon Unbox on TiVo service, consumers watch movies and TV shows downloaded from the Internet on their TV sets through their TiVo digital-video recorders. TiVo subscribers can rent or purchase TV shows and movies. The Amazon Unbox Video Download service, which does not require TiVo, was launched in September.

Consensus recommendation on Amazon.com shares among analysts who track them is a "hold," according to Thomson Financial. That consists of three "strong buys," three "buys," 12 "holds," nine "underperforms" and two "sells."

Earnings are expected to increase 49 percent this year, versus 11 percent forecast for the Internet software and services industry. Next year's projected 39 percent rise compares with 15 percent expected industrywide. The five-year annualized gain is forecast at 22 percent versus 14 percent for its peers.

Please give your opinion on the Royce Opportunity Fund. I wonder if I could do better.

-- R.S., via the Internet

It depends on whether you lust for adventure.

Boniface Zaino, portfolio manager since 1998, has seen fire and rain. A deep-value investor since the early 1970s, Zaino has experienced every market cycle several times and therefore has no qualms about buying cheap and waiting patiently for a revival.

He owns a whopping 275 stocks; his top position represents less than 1 percent of assets, so there is little risk from any single stock. But his emphasis on tiny micro-cap companies means some volatility is inevitable.

The $2.52 billion Royce Opportunity Fund (RYPNX) is up 11 percent during the past 12 months to rank above the midpoint of small value funds. Its three-year annualized return of 12 percent puts it in the lower half of its peers.

"Over long time periods Royce Opportunity can be stellar, but after a big run it typically won't do well for a while until there's another big run," said Todd Trubey, an analyst with Morningstar Inc. in Chicago. "If you aren't willing to take the ups and downs you won't be satisfied with this fund."

Because the fund has grown significantly it is not as nimble as it once was. But that is less of a handicap because Zaino buys several stocks within the same industry and doesn't hold too much of any one stock, Trubey said.

Undervalued asset plays, turnaround stories, undervalued growth opportunities and interrupted earnings are his bread and butter. The fund would work well in an investor portfolio that has many large-cap holdings.

This "no-load" (no sales charge) fund requires a $2,000 minimum initial investment and has an annual expense ratio of 1.14 percent.

What is the expense ratio and what is considered average?

-- D.P., via the Internet

The expense ratio is the percentage of total assets used to cover expenses associated with the fund's operation.

This includes the management fee charged by the fund's investment adviser for managing the portfolio; the administrative costs of record-keeping and mailings; 12b-1 distribution fees for marketing, and other operating expenses.

The average expense ratio for large-cap stock funds is 1.30 percent; mid-caps 1.49 percent; small-caps 1.57 percent; domestic equity 1.44 percent and international equity 1.64 percent, according to Morningstar.

All-stock funds average 1.48 percent versus all-bond funds that require less management at 1.09 percent. Index funds tend to have lower expense ratios.

yourmoney@tribune.com

Andrew Leckey writes for Tribune Media Services.

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