MPE Capital recently released its Q2 2020 Investor Letter, a copy of which you can download here. The fund posted a return of 10.8% in the first half of 2020, outperforming its benchmark, the S&P 500 which returned -3.1% in the same period. You should check out MPE Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash.
In the said letter, MPE Capital highlighted a few stocks and Wix.Com Ltd. (NASDAQ:WIX) is one of them. Wix.Com Ltd. (NASDAQ:WIX) is a software company offering cloud-based web development services. Year-to-date, Wix.Com Ltd. (NASDAQ:WIX) stock gained 132.4% and on July 29th it had a closing price of $279.38. Here is what MPE Capital said:
“One business we purchased during the first-half of 2020 is Wix. I have been a customer for years and have always thought it to be a great business. Their primary offering is a do-it-yourself website builder. Regardless of your proficiency in computers, they make it easy to create a professional website. They even have a more sophisticated version (Corvid) for users who want even more customization.
If you want to see high switching costs in action, take a look at Wix’s cohort data. Once customers put in the time to develop a website and become a premium subscriber, they tend to stick with Wix for years and years. Wix also benefits from economies of scale, as they can leverage the research and development of new offerings across a large number of subscribers.
The current CEO is a co-founder, something I like to see. Founder chief executives generally are very passionate about their businesses and most prioritize the long-term as opposed to next quarter’s results. The CEO’s brother is also a co-founder and has been with the company since inception. Co-founder Giora Kaplan was CTO since inception but recently stepped down. Management owns a fair amount of stock, which helps align their interests with ours as passive shareholders.
Wix is a high growth business reinvesting the majority of its cash flows back into the business. Valuation is a little more difficult due to all the income statement growth capex. They have grown revenues at a 40% annual rate over the last five years. Even during the COVID-19 crisis, first quarter 2020 revenues grew at a rate in excess of 20%. I believe the key drivers for Wix are the number of premium subscribers and revenues per subscriber. They have almost 5 million premium subscribers and about 175 million registered users who are not yet premium subscribers. Over time these registered users have a tendency to convert to premium customers.
Over the next five years, I’m forecasting that they will grow revenues at around 20% per annum. Current operating margins are negative, but I consider the majority of their sales and marketing spend (S&M) to be growth capex. Adjusting for the S&M spend and some more fixed cost leverage, I get a normalized steady state operating margin north of 30%. They also have a very healthy balance sheet with over $900 million in cash as of the first quarter—more than a year’s worth of revenue. I started buying at around $83 per share, hoping to buy more as the stock went lower. I wanted some more margin of safety due to the lower certainty I have in the valuation. Unfortunately, the stock didn’t go lower, but the good news is we are up three-fold since the purchase.”
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Last week, we published an article revealing that Baron Asset Fund is bullish on Wix.Com Ltd. (NASDAQ:WIX) stock. The investment believes that the company has a huge addressable market.
In Q1 2020, the number of bullish hedge fund positions on Wix.Com Ltd. (NASDAQ:WIX) stock decreased by about 15% from the previous quarter (see the chart here), so a number of other hedge fund managers don’t believe in WIX’s growth potential. Our calculations showed that Wix.Com Ltd. (NASDAQ:WIX) 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
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Disclosure: None. This article is originally published at Insider Monkey.
