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2019 Review: Top Hedge Fund Stocks vs. Melco Resorts & Entertainment Limited (MLCO)

Reymerlyn Martin

It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned 31.2% in 2019. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 41.3% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Melco Resorts & Entertainment Limited (NASDAQ:MLCO).

Melco Resorts & Entertainment Limited (NASDAQ:MLCO) was in 24 hedge funds' portfolios at the end of September. MLCO shareholders have witnessed an increase in support from the world's most elite money managers in recent months. There were 22 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 Q3 rankings and see the video at the end of this article for Q2 rankings).

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

[caption id="attachment_339612" align="aligncenter" width="600"] Kerr Neilson of Platinum Asset Management[/caption]

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock is still extremely cheap despite already gaining 20 percent. With all of this in mind we're going to take a gander at the latest hedge fund action surrounding Melco Resorts & Entertainment Limited (NASDAQ:MLCO).

What does smart money think about Melco Resorts & Entertainment Limited (NASDAQ:MLCO)?

At the end of the third quarter, a total of 24 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 9% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in MLCO over the last 17 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Lei Zhang's Hillhouse Capital Management has the biggest position in Melco Resorts & Entertainment Limited (NASDAQ:MLCO), worth close to $85.3 million, accounting for 1.2% of its total 13F portfolio. The second largest stake is held by Platinum Asset Management, managed by Kerr Neilson, which holds a $58.7 million position; the fund has 1.3% of its 13F portfolio invested in the stock. Some other members of the smart money that hold long positions encompass Brett Barakett's Tremblant Capital, Renaissance Technologies and Ken Griffin's Citadel Investment Group. In terms of the portfolio weights assigned to each position Indus Capital allocated the biggest weight to Melco Resorts & Entertainment Limited (NASDAQ:MLCO), around 4.66% of its 13F portfolio. Tremblant Capital is also relatively very bullish on the stock, dishing out 3.27 percent of its 13F equity portfolio to MLCO.

As industrywide interest jumped, some big names have jumped into Melco Resorts & Entertainment Limited (NASDAQ:MLCO) headfirst. Hillhouse Capital Management, managed by Lei Zhang, established the biggest position in Melco Resorts & Entertainment Limited (NASDAQ:MLCO). Hillhouse Capital Management had $85.3 million invested in the company at the end of the quarter. Ben Levine, Andrew Manuel and Stefan Renold's LMR Partners also made a $10.7 million investment in the stock during the quarter. The other funds with brand new MLCO positions are Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, Fang Zheng's Keywise Capital Management, and Israel Englander's Millennium Management.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Melco Resorts & Entertainment Limited (NASDAQ:MLCO) but similarly valued. We will take a look at Teck Resources Ltd (NYSE:TECK), RPM International Inc. (NYSE:RPM), Bright Horizons Family Solutions Inc (NYSE:BFAM), and Brookfield Property Partners LP (NASDAQ:BPY). This group of stocks' market caps resemble MLCO's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TECK,17,575085,-6 RPM,32,410079,7 BFAM,27,216673,7 BPY,8,32207,2 Average,21,308511,2.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 21 hedge funds with bullish positions and the average amount invested in these stocks was $309 million. That figure was $534 million in MLCO's case. RPM International Inc. (NYSE:RPM) is the most popular stock in this table. On the other hand Brookfield Property Partners LP (NASDAQ:BPY) is the least popular one with only 8 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. 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. Hedge funds were also right about betting on MLCO, though not to the same extent, as the stock returned 41.2% during 2019 and outperformed the market as well. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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