Third-quarter filing season is here, and it truly is a sight to behold. While some hedge fund managers traditionally maintain small portfolios of 20 to 30 stocks, there are others who can make mere bean-counting seem like a death sentence. Steven Cohen's SAC Capital Advisors is one such fund: At the end of last quarter, it held more than 1,000 U.S. stocks in its portfolio, per the 13F. That's probably why you haven't heard this story about Amazon (AMZN) yet -- it's taken us a wee bit of time to sift through Cohen's mammoth filing with the Securities and Exchange Commission.
We'll start out with a bit of history between the hedge fund manager and Amazon. At the end of the second quarter, Cohen and his investment team at SAC Capital reported a $239 million position in the e-retailer, an astounding 240% increase from one quarter earlier. With this bullish bet in hand, SAC was officially the third-largest Amazon shareholder of the funds we track, behind those of John Griffin and Ken Fisher. It's important to realize that the stock was also Cohen's fourth-largest holding at the midway point of 2012 -- whereas, a year earlier, it hadn't cracked the manager's top 25.
That's why Cohen's move last quarter was so interesting. His latest 13F indicates that he sold off almost two-thirds of his entire position in Amazon, and that he held just $94.8 million worth of the stock at the end of September, when shares were trading near an all-time high of $264.11. Cohen also reported what appeared to be a short straddle position with $1 million of downside exposure.
Now, we'll be the first to tell you that Cohen wasn't the only hedge fund manager who appeared to be profit-taking during this period. What warrants some pondering, however, is the magnitude of the manager's transaction just three short months after the initiation of a massively bullish bet. As you're probably aware, three weeks after the end of the third quarter marked an earnings disappointment for Amazon, which missed most of Wall Street's expectations on the top and bottom lines. Assuming that Cohen sold near the stock's peak, he popped the equivalent of a painkiller for Amazon's decline. Its shares have lost close to 10% in the past month, and now trade in the $220 range.
Looking forward, we find it increasingly possible that Amazon could continue to see downward pressure as 2012 comes to a close. Technical analysis shows us a mixed picture, but the real thing to watch with this company is the fundamentals. Amazon's valuation continues to defy all logical analyses, as it trades at a cash flow premium of close to 50% above historical levels, and price-to-earnings metrics are through the roof. One statistic that goes unnoticed is the e-retailer's operating margins, which have been depressed to the tune of under 2% in each of the past five quarters. Obviously present profitability is being sacrificed for hopes of future expansion, but we question just how rosy Amazon's outlook should be if it continues to shift its focus away from core business operations.
In short, Amazon is being valued like a high-flying tech company even though the majority of its revenue is derived from retail. Weak financials do not help here, either. Some of the smart money's biggest players have already downsized their Amazon positions quite significantly, indicating that individual investors might consider the possibility that a peak has been reached, at least in the near term. With a tax-related selloff looking set to hang over the markets for the remainder of the year, it's probably a good idea to lock in gains here if you haven't done so already.