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 Index returned approximately 12.1% in the first 5 months of this year (through May 30th). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the same 5-month 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' 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 Mercadolibre Inc (NASDAQ:MELI).
Mercadolibre Inc (NASDAQ:MELI) investors should pay attention to an increase in enthusiasm from smart money recently. Our calculations also showed that meli isn't among the 30 most popular stocks among hedge funds.
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 25.8% year to date (through May 30th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 40 percentage points since its inception (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
We're going to analyze the recent hedge fund action surrounding Mercadolibre Inc (NASDAQ:MELI).
How are hedge funds trading Mercadolibre Inc (NASDAQ:MELI)?
Heading into the second quarter of 2019, a total of 41 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 32% from the fourth quarter of 2018. By comparison, 30 hedge funds held shares or bullish call options in MELI a year ago. With hedge funds' sentiment swirling, there exists a select group of notable hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).
More specifically, Alkeon Capital Management was the largest shareholder of Mercadolibre Inc (NASDAQ:MELI), with a stake worth $631.9 million reported as of the end of March. Trailing Alkeon Capital Management was Generation Investment Management, which amassed a stake valued at $435.2 million. D E Shaw, Lone Pine Capital, and Viking Global were also very fond of the stock, giving the stock large weights in their portfolios.
Consequently, some big names have been driving this bullishness. Viking Global, managed by Andreas Halvorsen, created the most valuable position in Mercadolibre Inc (NASDAQ:MELI). Viking Global had $310.7 million invested in the company at the end of the quarter. Jim Simons's Renaissance Technologies also initiated a $119 million position during the quarter. The following funds were also among the new MELI investors: Josh Resnick's Jericho Capital Asset Management, James Crichton's Hitchwood Capital Management, and Josh Donfeld and David Rogers's Castle Hook Partners.
Let's now review hedge fund activity in other stocks similar to Mercadolibre Inc (NASDAQ:MELI). These stocks are Sun Life Financial Inc. (NYSE:SLF), PPL Corporation (NYSE:PPL), DTE Energy Company (NYSE:DTE), and Palo Alto Networks Inc (NYSE:PANW). This group of stocks' market valuations resemble MELI's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SLF,11,103048,1 PPL,22,867762,-1 DTE,25,718544,2 PANW,44,2558221,-2 Average,25.5,1061894,0 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 25.5 hedge funds with bullish positions and the average amount invested in these stocks was $1062 million. That figure was $2802 million in MELI's case. Palo Alto Networks Inc (NYSE:PANW) is the most popular stock in this table. On the other hand Sun Life Financial Inc. (NYSE:SLF) is the least popular one with only 11 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 calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on MELI as the stock returned 13.9% during the same period and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.