Billionaire Warren Buffett praised Amazon.com Inc last July for its decision to account for stock options as an expense, saying it took "particular courage" and would be "recognized and remembered." A week later, Buffett bought US$98.3 million of the company's junk bonds.
Buffett's Geico Corp, the auto insurance unit of his Berkshire Hathaway Inc, stands to make a US$16.4 million profit on the investment in high-risk debt if Amazon.com, the world's largest Web merchant, repurchases the 10 percent senior notes next month, as some analysts predict. That would be an almost 17 percent return for an investor who avoided Internet investments during the 1990s boom in technology shares.
If Buffett hits his payday, he will have demonstrated -- again -- his ability to make money at a time when he considers stocks overpriced. Berkshire boosted its junk bond holdings six-fold last year to US$8.3 billion, buying securities in industries that the billionaire has previously shunned, including telecommunications.
"It just proves again that Buffett is usually one step ahead of everyone else," said Jake Dollarhide, a money manager at Fredric E. Russell Investment Management Co, which owns about 700 Berkshire shares.
Geico, whose portfolio is controlled by Louis Simpson, bought 109,239 of the 10 percent discount notes for US$900 per US$1,000 face amount, according to a filing with the National Association of Insurance Commissioners, which monitors insurers' financial reports and solvency.
The bonds are redeemable next month at US$1,050 each, which means Geico's return would be 22 percent on an annualized basis.
The bonds were sold in 1998 with no interest to be paid for five years. Amazon.com already has redeemed US$266 million of the notes.
By calling the remaining US$264 million, Amazon.com would eliminate the US$26.4 million of annual interest costs it must start paying in November.
Amazon.com had US$1.3 billion of cash and marketable securities at the end of last year and may repurchase the notes when they are callable on May 1, analysts said.
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