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JD.Com (JD) Has Risen 142% in Last One Year, Outperforms Market

If you are looking for the best ideas for your portfolio you may want to consider some of Hayden Capital’s top stock picks. Hayden Capital, an investment management firm, is bearish on JD.Com Inc (NASDAQ:JD) stock. In its Q2 2019 investor letter – you can download a copy here – the firm discussed its investment thesis on JD.Com Inc (NASDAQ:JD) stock. JD.Com Inc (NASDAQ:JD) is an e-commerce company.

On August 11, 2019, Hayden Capital had released its Q2 2019 investor letter. The investment first said that it sold its position held in JD.Com Inc (NASDAQ:JD) stock in Q2 2019. JD.Com Inc (NASDAQ:JD) stock has posted a return of 142.1% in the trailing one year period, outperforming fund’s benchmark the S&P 500 Index which returned 11.9% in the same period. This suggests that the investment firm was wrong in its decision. On a year-to-date basis, JD.Com Inc (NASDAQ:JD) stock has risen by 116.4%.

Hayden Capital fund posted a return of 11.98% in the second quarter of 2019, outperforming fund’s benchmark the S&P 500 Index which returned 4.30% in the same period. Let’s take a look at comments made by Hayden Capital about JD.Com Inc (NASDAQ:JD) stock in the Q2 2019 investor letter.

“JD.com (JD): This quarter, I also finalized the sale of our position in JD.com. I’ve laid out our detailed thesis on the company in past letters, which unfortunately haven’t panned out.

We originally bought the position in March 2017, predicated on the thesis that as Chinese GDP per capita rises, consumers would increasingly place emphasis on shipping times and name brand / authentic products. In addition, as the consumer base widened and shoppers got in the habit of instant gratification (due to same day / next day shipping), they would engage with the platform more often. The thesis was that this engagement and resulting loyalty to the platform, would allow JD to branch out into higher-margin general merchandise categories (which also have higher order frequencies) vs. their traditional electronics & appliances (lower margin, low order frequency), which would result in higher profits and margins.

Two years later, the broader theses points came true. GDP per capita has risen +21% in just the last two years ($9.8K in 2018 vs. $8.1K in 2016; LINK), which has led to a greater focus on quality products vs. cheap price. But the beneficiary of this was Alibaba and not JD.

For example, Alibaba’s Taobao platform (consumer-to-consumer marketplace), which historically was known for cheap products but of questionable authenticity, has grown GMV +18.9% annually the last two years. This is compared to Tmall, Alibaba’s business-to-consumer platform, where brands sell authentic goods directly to consumers, which has grown +10% faster (+29.2% annually) over the same time frame.

At the same time, Alibaba did a great job implementing Cainiao, its network of 3rd party logistics operators. Just look at the decrease in shipping times over these past few years. Alibaba’s delivery times have improved even further since this graph, and is now able to delivery packages the same day in many Tier 1 cities. This drastically lowered the attractiveness of JD’s value proposition, which combined with the Tmall offering, narrowed JD’s competitive advantage.

Anecdotally, I’ve also heard more and more stories of employees looking to leave the firm. Tech startups in China don’t recruit from JD (a negative signal for JD’s technological abilities), most commonly preferring instead Alibaba, Bytedance, or Huawei (at least among those I’ve spoken to)12.

Note, while the scandal around founder Richard Liu added another layer to the thesis, it didn’t play a major role in our decision to sell. After the incident, and more importantly after digging deeper into his personal background, my opinion of Richard’s integrity worsened. But it was clear he hadn’t committed a crime in this particular case, and would be acquitted13.

In our Q3 2018 letter, I outlined some of these issues but mentioned my view that the drop in the stock price due to the allegation, was too much. I decided to wait for shares to recover, and ultimately sold in April and May this year at ~$29.

We owned the shares for approximately two years, building a full position at an average price of $37. During this period, we recognized a total loss of -22%. Rest assured, many of the lessons from this experience, will be applied to future investments. One example, understanding the ability of a 3P Marketplace to successfully drive engagement and build a complementary network of logistics partners without owning the assets, has already benefited our mental model for Shopee / Sea Ltd.

I’ve taken the opportunity this quarter, to clean up our portfolio. Over the course of an investment career, I’m sure I’ll make many more mistakes and some of our theses simply won’t pan out. That comes with the nature of the business. More importantly though, is to learn from these experiences and apply them to how we think about future investments – we never want a good learning opportunity to go to waste.”

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In Q2 2020, the number of bullish hedge fund positions on JD.Com Inc (NASDAQ:JD) stock decreased by about 3% from the previous quarter (see the chart here), so a number of other hedge fund managers don’t seem to agree with JD’s growth potential. Our calculations showed that JD.Com Inc (NASDAQ:JD) isn’t ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. You can subscribe to our free enewsletter below to receive our stories in your inbox:

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