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

Many prominent investors, including Warren Buffett, David Tepper and Stan Druckenmiller, have been cautious regarding the current bull market and missed out as the stock market reached another high in recent weeks. On the other hand, technology hedge funds weren’t timid and registered double digit market beating gains. Financials, energy and industrial stocks aren’t doing great but many of the stocks that delivered strong returns since March are still going very strong and hedge funds actually increased their positions in these stocks. In this article we will find out how hedge fund sentiment to Mercadolibre Inc (NASDAQ:MELI) changed recently.

Hedge fund interest in Mercadolibre Inc (NASDAQ:MELI) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that MELI isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Kimberly Clark Corporation (NYSE:KMB), ABB Ltd (NYSE:ABB), and Spotify Technology S.A. (NYSE:SPOT) to gather more data points. Our calculations also showed that MELI isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.

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 56 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 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

David Blood of Generation Investment Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind let’s take a peek at the latest hedge fund action regarding Mercadolibre Inc (NASDAQ:MELI).

What does smart money think about Mercadolibre Inc (NASDAQ:MELI)?

Heading into the third quarter of 2020, a total of 60 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. By comparison, 52 hedge funds held shares or bullish call options in MELI a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, GQG Partners held the most valuable stake in Mercadolibre Inc (NASDAQ:MELI), which was worth $996.6 million at the end of the third quarter. On the second spot was Alkeon Capital Management which amassed $653.8 million worth of shares. Generation Investment Management, Tybourne Capital Management, and Citadel Investment Group 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 Marcho Partners allocated the biggest weight to Mercadolibre Inc (NASDAQ:MELI), around 25.89% of its 13F portfolio. Prince Street Capital Management is also relatively very bullish on the stock, dishing out 15.08 percent of its 13F equity portfolio to MELI.

Since Mercadolibre Inc (NASDAQ:MELI) has witnessed bearish sentiment from hedge fund managers, it’s easy to see that there lies a certain “tier” of money managers that elected to cut their entire stakes by the end of the second quarter. It’s worth mentioning that Ryan Frick and Oliver Evans’s Dorsal Capital Management cut the biggest investment of the “upper crust” of funds monitored by Insider Monkey, worth close to $47.9 million in stock. Louis Bacon’s fund, Moore Global Investments, also sold off its stock, about $15.1 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Mercadolibre Inc (NASDAQ:MELI) but similarly valued. We will take a look at Kimberly Clark Corporation (NYSE:KMB), ABB Ltd (NYSE:ABB), Spotify Technology S.A. (NYSE:SPOT), Dollar General Corp. (NYSE:DG), Barrick Gold Corporation (NYSE:GOLD), Equinor ASA (NYSE:EQNR), and Lam Research Corporation (NASDAQ:LRCX). All of these stocks’ market caps are closest to MELI’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 39.1 hedge funds with bullish positions and the average amount invested in these stocks was $1691 million. That figure was $4428 million in MELI’s case. Dollar General Corp. (NYSE:DG) is the most popular stock in this table. On the other hand ABB Ltd (NYSE:ABB) is the least popular one with only 10 bullish hedge fund positions. Mercadolibre Inc (NASDAQ:MELI) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for MELI is 78.9. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 29.2% in 2020 through October 16th and still beat the market by 19.7 percentage points. Hedge funds were also right about betting on MELI as the stock returned 29% since the end of Q2 (through 10/16) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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