Did Hedge Funds Make The Right Call On Melco Resorts & Entertainment Limited (MLCO) ?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Melco Resorts & Entertainment Limited (NASDAQ:MLCO) and determine whether the smart money was really smart about this stock.

Is Melco Resorts & Entertainment Limited (NASDAQ:MLCO) a buy right now? The smart money was taking a bearish view. The number of long hedge fund bets shrunk by 7 lately. Our calculations also showed that MLCO isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Ricky Sandler of Eminence Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s view the recent hedge fund action surrounding Melco Resorts & Entertainment Limited (NASDAQ:MLCO).

How are hedge funds trading Melco Resorts & Entertainment Limited (NASDAQ:MLCO)?

At the end of the first quarter, a total of 28 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -20% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in MLCO over the last 18 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

Is MLCO A Good Stock To Buy?

According to Insider Monkey’s hedge fund database, Kerr Neilson’s Platinum Asset Management has the biggest position in Melco Resorts & Entertainment Limited (NASDAQ:MLCO), worth close to $58.7 million, accounting for 1.5% of its total 13F portfolio. The second largest stake is held by Hyder Ahmad of Broad Peak Investment Holdings, with a $55.9 million position; the fund has 6.5% of its 13F portfolio invested in the stock. Other professional money managers that hold long positions contain Brett Barakett’s Tremblant Capital, Renaissance Technologies and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position Brightlight Capital allocated the biggest weight to Melco Resorts & Entertainment Limited (NASDAQ:MLCO), around 8.83% of its 13F portfolio. Broad Peak Investment Holdings is also relatively very bullish on the stock, dishing out 6.5 percent of its 13F equity portfolio to MLCO.

Because Melco Resorts & Entertainment Limited (NASDAQ:MLCO) has faced declining sentiment from the aggregate hedge fund industry, it’s safe to say that there were a few money managers that elected to cut their positions entirely in the first quarter. Intriguingly, Steve Cohen’s Point72 Asset Management sold off the biggest investment of the 750 funds followed by Insider Monkey, totaling about $27.1 million in stock, and David Kowitz and Sheldon Kasowitz’s Indus Capital was right behind this move, as the fund sold off about $14.3 million worth. These bearish behaviors are interesting, as total hedge fund interest dropped by 7 funds in the first quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Melco Resorts & Entertainment Limited (NASDAQ:MLCO) but similarly valued. These stocks are The Scotts Miracle-Gro Company (NYSE:SMG), Pegasystems Inc. (NASDAQ:PEGA), Huaneng Power International Inc (NYSE:HNP), and Commerce Bancshares, Inc. (NASDAQ:CBSH). All of these stocks’ market caps match MLCO’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SMG 28 256079 -3
PEGA 33 1023977 8
HNP 3 2437 0
CBSH 15 44791 5
Average 19.75 331821 2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.75 hedge funds with bullish positions and the average amount invested in these stocks was $332 million. That figure was $482 million in MLCO’s case. Pegasystems Inc. (NASDAQ:PEGA) is the most popular stock in this table. On the other hand Huaneng Power International Inc (NYSE:HNP) is the least popular one with only 3 bullish hedge fund positions. Melco Resorts & Entertainment Limited (NASDAQ:MLCO) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on MLCO, though not to the same extent, as the stock returned 25.2% during the second quarter and outperformed the market as well.

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