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Melco Resorts & Entertainment (MLCO): Hedge Funds Caught Flat-Footed

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. With the first-quarter round of 13F filings behind us it is time to take a look at the stocks in which some of the best money managers in the world preferred to invest or sell heading into the first quarter. One of these stocks was Melco Resorts & Entertainment Limited (NASDAQ:MLCO).

Melco Resorts & Entertainment Limited (NASDAQ:MLCO) shareholders have witnessed an increase in support from the world’s most elite money managers of late. MLCO was in 35 hedge funds’ portfolios at the end of December. There were 27 hedge funds in our database with MLCO holdings at the end of the previous quarter. Our calculations also showed that MLCO isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 41 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

RENAISSANCE TECHNOLOGIES

Jim Simons of Renaissance Technologies

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to go over the key hedge fund action regarding Melco Resorts & Entertainment Limited (NASDAQ:MLCO).

How have hedgies been trading Melco Resorts & Entertainment Limited (NASDAQ:MLCO)?

Heading into the first quarter of 2020, a total of 35 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 30% from one quarter earlier. By comparison, 21 hedge funds held shares or bullish call options in MLCO a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is MLCO A Good Stock To Buy?

More specifically, Renaissance Technologies was the largest shareholder of Melco Resorts & Entertainment Limited (NASDAQ:MLCO), with a stake worth $104.2 million reported as of the end of September. Trailing Renaissance Technologies was Citadel Investment Group, which amassed a stake valued at $98.5 million. Broad Peak Investment Holdings, Platinum Asset Management, and NWI Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Brightlight Capital allocated the biggest weight to Melco Resorts & Entertainment Limited (NASDAQ:MLCO), around 13% of its 13F portfolio. Broad Peak Investment Holdings is also relatively very bullish on the stock, designating 10.81 percent of its 13F equity portfolio to MLCO.

Now, key hedge funds were leading the bulls’ herd. Brightlight Capital, managed by Vadim Rubinchik, established the most outsized position in Melco Resorts & Entertainment Limited (NASDAQ:MLCO). Brightlight Capital had $17.2 million invested in the company at the end of the quarter. Benjamin A. Smith’s Laurion Capital Management also initiated a $1.6 million position during the quarter. The other funds with brand new MLCO positions are Kevin Mok’s Hidden Lake Asset Management, Nick Thakore’s Diametric Capital, and Charles Davidson and Joseph Jacobs’s Wexford Capital.

Let’s now review hedge fund activity in other stocks similar to Melco Resorts & Entertainment Limited (NASDAQ:MLCO). We will take a look at Carlyle Group LP (NASDAQ:CG), Advance Auto Parts, Inc. (NYSE:AAP), WestRock Company (NYSE:WRK), and Bio-Rad Laboratories, Inc. (NYSE:BIO). 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
CG 13 213484 5
AAP 42 1621720 1
WRK 35 765253 3
BIO 44 1030931 0
Average 33.5 907847 2.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.5 hedge funds with bullish positions and the average amount invested in these stocks was $908 million. That figure was $836 million in MLCO’s case. Bio-Rad Laboratories, Inc. (NYSE:BIO) is the most popular stock in this table. On the other hand Carlyle Group LP (NASDAQ:CG) is the least popular one with only 13 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. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 22.3% in 2020 through March 16th but beat the market by 3.2 percentage points. Unfortunately MLCO wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on MLCO were disappointed as the stock returned -40.7% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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

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