Hayden Capital recently released its Q2 2020 Investor Letter, a copy of which you can download here. The fund posted a return of 93.2% for the quarter, outperforming their benchmark, the S&P 500 Index which returned 20.0% in the same quarter. You should check out Hayden Capital’s top 5 stock picks which helped them beat the market by nearly 73 percentage points. There weren’t a lot of funds who could deliver these kinds of returns without shorting the market or using aggressive put options.
In the said letter, Hayden Capital highlighted a few stocks and Sea Ltd (NYSE:SE) is one of them. Sea Ltd (NYSE:SE) is an internet company. Year-to-date, Sea Ltd (NYSE:SE) stock gained 221.0% and on August 12th it had a closing price of $126.92. Here is what Hayden Capital said:
“Sea Ltd also experienced a similar dynamic of both rapid revenue growth and expanding multiples. But how it achieved this was a bit different.
When we invested in late 2018, I could see that Garena (the gaming business) was a phenomenal business, but I had trouble underwriting the newly self-developed (and less than a year old at the time) game Free Fire 9 . Additionally, Garena was providing all the cash flow for Sea Ltd to invest in its Shopee e-commerce platform.
If Garena stumbled (which I thought unlikely given the robustness of its core republishing model), then the cash stream to invest in Shopee would stop, and it would put the entire firm in a precarious position, have to raise far more outside capital, and during that time risk losing the momentum it had to reach its marketplace “tipping point” before competitors (see our Q1 2019 letter for our initial Sea Ltd thesis + more discussion on the marketplace / network effect “tipping point” concept; LINK).
It was really a “bet the farm” moment for Sea Ltd – but one that I thought was the correct decision given the sheer size of the prize if it worked, and the ability to retrench and still salvage value on the Garena side if it didn’t. I had indications that Shopee’s marketplace was performing far better than the competition, which was confirmed in the following months when Sea released the division’s KPIs 10. Plus, the market was actually punishing the company for this move at the time, so we were getting paid for taking the optionality. In short, I saw a massive opportunity, while the market saw a gaming company burning cash on an ecommerce business it had no right to be in. This allowed us to buy the shares at a very low entry multiple.
In the past two years, Garena’s Free Fire has become one of the Top 3 downloaded mobile games worldwide (LINK). These profits have in turn have fueled Shopee’s rise to be the #1 ecommerce marketplace across Southeast Asia, and most importantly, profitability (read: self-sustainability) in its two largest markets. As a result, these two drivers have resulted in a 5.1x increase in revenues.
But unlike Amazon, the multiple expansion wasn’t because Sea Ltd pivoted into higher margin business lines – gaming and retail marketplaces both have roughly the same 40 – 60% margin profiles at maturity 11. The company simply executed on its strategic plan that was well-known at our initial investment – it’s just other investors didn’t believe they could pull it off.
The multiple expansion came from Shopee gradually “proving itself” in the last two years, and investors having more confidence that the 40% operating margins that marketplaces tend to enjoy will eventually reach investor’s pockets. The fact that Shopee Taiwan already enjoys 20%+ margins and Indonesia is at break-even levels, only provides further confidence of this pathway.
As a result, the multiples have simply expanded from “extremely pessimistic” to “fair”. Considering I expect Shopee to continue growing 70 – 90% per year over the next couple years, while Garena shows no signs of stopping with Free Fire still helping to add gamers at +50% y/y and revenues 20 – 30% y/y, and Shopee’s new e-wallet business executing aggressively, I can imagine Sea Ltd will be a core part of our portfolio for many years. Sea Ltd management team’s execution continues to exceed even our loftiest initial expectations.”
Copyright: robtek / 123RF Stock Photo
Last month, we published an article revealing that Tao Value is bullish about Sea Ltd (NYSE:SE) stock. The investment firm believes that the company continues to benefit from gaming growth.
In Q1 2020, the number of bullish hedge fund positions on Sea Ltd (NYSE:SE) stock remained unchanged from the previous quarter (see the chart here). Our calculations showed that Sea Ltd (NYSE:SE) 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.
