Were Hedge Funds Right About Piling Into Mercadolibre Inc (MELI)?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Mercadolibre Inc (NASDAQ:MELI) and determine whether hedge funds had an edge regarding this stock.

Is Mercadolibre Inc (NASDAQ:MELI) undervalued? The smart money was taking a bullish view. The number of bullish hedge fund positions moved up by 8 recently. Our calculations also showed that MELI 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). MELI was in 60 hedge funds’ portfolios at the end of the first quarter of 2020. There were 52 hedge funds in our database with MELI holdings at the end of the previous quarter.

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

Today there are a lot of indicators shareholders use to analyze their stock investments. Some of the most innovative indicators are hedge fund and insider trading indicators. Our experts have shown that, historically, those who follow the top picks of the elite fund managers can outperform the broader indices by a healthy amount (see the details here).

Lone Pine Capital 2015 Q2 Investor Letter

Stephen Mandel of Lone Pine Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. 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 gold 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 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. Keeping this in mind let’s check out the new hedge fund action surrounding Mercadolibre Inc (NASDAQ:MELI).

How have hedgies been trading Mercadolibre Inc (NASDAQ:MELI)?

At Q1’s end, a total of 60 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 15% from one quarter earlier. By comparison, 41 hedge funds held shares or bullish call options in MELI 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 MELI A Good Stock To Buy?

The largest stake in Mercadolibre Inc (NASDAQ:MELI) was held by Generation Investment Management, which reported holding $323.5 million worth of stock at the end of September. It was followed by GQG Partners with a $283.7 million position. Other investors bullish on the company included Tybourne Capital Management, Alkeon Capital Management, and Viking Global. In terms of the portfolio weights assigned to each position Prince Street Capital Management allocated the biggest weight to Mercadolibre Inc (NASDAQ:MELI), around 11.48% of its 13F portfolio. Kora Management is also relatively very bullish on the stock, earmarking 9.95 percent of its 13F equity portfolio to MELI.

As aggregate interest increased, specific money managers have been driving this bullishness. GQG Partners, managed by Rajiv Jain, initiated the biggest position in Mercadolibre Inc (NASDAQ:MELI). GQG Partners had $283.7 million invested in the company at the end of the quarter. Panayotis Takis Sparaggis’s Alkeon Capital Management also made a $206.5 million investment in the stock during the quarter. The other funds with new positions in the stock are Louis Bacon’s Moore Global Investments, Howard Marks’s Oaktree Capital Management, and Principal Global Investors’s Columbus Circle Investors.

Let’s now take a look at hedge fund activity in other stocks similar to Mercadolibre Inc (NASDAQ:MELI). We will take a look at Suncor Energy Inc. (NYSE:SU), Republic Services, Inc. (NYSE:RSG), IHS Markit Ltd. (NASDAQ:INFO), and eBay Inc (NASDAQ:EBAY). All of these stocks’ market caps are closest to MELI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SU 30 766498 -9
RSG 32 709358 6
INFO 44 1159316 15
EBAY 52 3096036 1
Average 39.5 1432802 3.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 39.5 hedge funds with bullish positions and the average amount invested in these stocks was $1433 million. That figure was $2099 million in MELI’s case. eBay Inc (NASDAQ:EBAY) is the most popular stock in this table. On the other hand Suncor Energy Inc. (NYSE:SU) is the least popular one with only 30 bullish hedge fund positions. Compared to these stocks Mercadolibre Inc (NASDAQ:MELI) is more popular among hedge funds. 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on MELI as the stock returned 101.8% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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