Melvin Capital's 62 Stock Portfolio: Top 10 Holdings Analyzed - Sure Dividend

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Melvin Capital’s 62 Stock Portfolio: Top 10 Holdings Analyzed


Updated on March 31st, 2021 by Nikolaos Sismanis

Melvin Capital Management LP is a registered investment advisor headquartered in New York City. The partnership uses a bottom-up approach to finding attractive investments on both the long and short sides of equities, focusing on fundamentals.

Melvin Capital was founded in late-2014 by Gabriel Plotkin, who continues to serve as the partnership’s chief investment officer, and is the firm’s principal owner. The fund was started with $1 billion in seed money but has since grown to more than $23.5 billion in assets under management (AUM) in the seven years since.

Plotkin was once a trader at Steven Cohen’s Point72 hedge fund, where he focused on consumer stocks and managed over a billion dollars. After achieving success at Point72, Plotkin went out on his own and founded Melvin Capital Management, which he named after his grandfather.

Investors following the company’s 13F filings over the last 3 years (from mid-February, 2018 through mid-February 2021) would have generated annual total returns of 19.54%. This is above the S&P 500’s annualized total returns of 12.50% over the same time period.

Note: 13F filing performance is different than fund performance.  See how we calculate 13F filing performance here.

You can download an Excel spreadsheet with metrics that matter of Melvin Capital’s current 13F equity holdings below:

 

Keep reading to learn more about Melvin Capital.

Table Of Contents

Melvin Capital’s Investing Strategy

Melvin Capital seeks to deliver superior, risk-adjusted returns by employing a long-short equity strategy. The firm primarily invests in the common stock of US-based issuers, but also employs other instruments, such as depository receipts, rights, warrants, options, derivatives, fixed income securities, foreign exchanged hedges, commodity hedges, and other debt instruments.

Melvin Capital serves as the management company with discretionary trading authority to private pooled investment vehicles, and separately managed accounts. Its clients are generally institutions, pension plans, high net worth individuals, and other sophisticated investors. Its minimum initial investment is generally $1 million, and for managed accounts, that minimum is generally in excess of $50 million.

Its funds include Melvin Capital LP, Melvin Capital Offshore Ltd, Melvin Capital Master Fund Ltd, Melvin Capital II LP, Melvin Capital II Offshore Ltd, and Melvin Capital II Ltd. The offshore and onshore funds invest substantially all of their assets through the master funds.

Melvin Capital’s Portfolio and Top Holdings

As of its February 2021 13F filing, Melvin Capital had 62 total reported positions in US equities for a total market value of $23.5 billion. That’s 10 fewer individual holdings than last quarter, implying that the fund is concentrating its holdings, doubling-down on its existing positions.

During the quarter, Melvin made the following notable portfolio adjustments:

New Buys (above 1% of total holdings):

New Sells:

Still, the portfolio is quite diversified. Its largest position, Expedia Group, accounts for 8.4%, while its top 10 ten holdings account for just under 50% of the total portfolio weight.

Source: Company filings, Author

Melvin’s top holdings as of its latest 13F filing are the following:

Booking Holdings (BKNG) & Expedia (EXPE)        

Travel-industry behemoths Booking and Expedia were primary victims of COVID-19. Travel restrictions and the staying-at-home economy collapsed the demand for booking hotels, car rentals, and table reservations. As a result, both companies saw their revenues more than halve during 2020.

Over the past year, Melvin has been accumulating more shares of the duo. During the latest quarter, Melvin increased its position in Expedia by 16%, which is now the fund’s largest holding. The Booking Holdings position was trimmed by 31% during the quarter, as shares quickly returned to new all-time high levels.

Considering that both stocks collectively account for just under 12% of the total portfolio, Melvin’s confidence towards a rapid recovery in the tourism industry remains robust.

Visa (V) & Mastercard (MA)

The payment-processing duo enjoys an exceptional business model, in an industry with a high barrier to entry. Having powerful relations with every major bank in the world, the two companies operate practically in a duopoly, governing the payment-processing industry. With their toll-booth-type operations on every non-cash physical and digital transaction, Visa and Mastercard are set to naturally grow as the global economies go cashless, which is an incredibly favorable wind.

COVID-19 adversely affected the global volumes for Visa and Mastercard, hence damaging their revenues. However, recover the recovery signs are quite strong based on their latest quarterly results. While they have underperformed the overall tech sector as of lately due to their slackened performance, the two companies remain attractive investments for the long-term, with a bulky margin of safety and AAA management teams.

Capital returns continue to remain attractive as well. Both Visa and Mastercard have been growing their dividends at double-digit rates, while retiring considerable amounts of their stock each quarter, further boosting their EPS growth.

Visa and Mastercard are Melvin’s second and third-largest holdings, accounting for 7.6% and 5.5% of the fund’s portfolio, respectively.

Facebook Inc. (FB)

Facebook is a tremendous cash cow, but with a problem. On one hand, with strong financials, one of Wall St.’s healthiest balance sheets, and the best platform for advertisers to utilize, Facebook has been dominating the social media industry. The company reported an all-time high bottom line of $11.22 billion, amid great user growth which remained in the double-digits once again.

On the other hand, the stock has failed to attract an appropriate valuation multiple, as the steep scrutiny it has faced over the past few years have made Facebook a non-investor-friendly company. Facebook missteps have been quite detrimental in creating this narrative, especially now that investors are increasingly more eager for ESG friendly investments.  Hence, the stock is only trading at 25 times its underlying earnings, despite its rapid growth.

With its ARPU (average revenue per user) proliferating, Facebook’s financials are more than likely to continue expanding rapidly, while the stock will eventually reflect the company’s underlying qualities.

The company is Melvin’s 4th largest holding, despite the position being initiate as recently as during its latest 13F filing.

Pinterest (PINS)

Idea-sharing platform Pinterest is Melvin’s 5th largest position. The company has been growing rapidly, as the staying-at-home economy has boosted traffic in home-improvement and related websites, including Pinterest. Investors should note that Pinterest’s profitability has not yet been cemented, though with strong gross margins the bottom line should flourish in the long-term, as the company minimizes its expenditures over time.

Melvin trimmed its equity stake in the company by 27%, likely in order to realize some gains off of the stock’s prolonged rally during the quarter.

L Brands (LB)

The specialty retailer behind Victoria’s Secret had an awful last few years, with retail sales suffering massively. COVID-19 adding extra pressure to retail locations, the company’s shares collapsed to around $8 during March, from around $97 four years ago. Melvin doubled its position during the stock’s nosedive, making a nice profit on the way back up.

The fund trimmed its position by around 12% during the last quarter (Q3). With shares surging even further over the past quarter amid the company’s better than expected recovery, the fund once again (Q4) trimmed its position by 18%, unloading more of its very successful distressed pick.

While the fund’s position has been paying off greatly, it’s worth noting that the company is facing significant liquidity risks, which investors must be wary of before allocating capital towards a retail-focused company. Still, at a forward P/E of just 13, the stock remains quite attractive despite its prolonged rally and its retail operations.

L Brands is Melvin’s 6th largest holding.

Alphabet (GOOGL):

Alphabet, Google’s parent company, occupies around 4.2% of Melvin’s total holdings after the fund increased its stake by a significant 77% compared to its last f13 filing. The company has become increasingly more attractive to investors, amid excellent financials and growth. Gross margins are healthy at nearly 54%, while revenue has seen uninterrupted growth. However, Alphabet still does not pay a dividend.

As a result of steady net income margins in the low 20s%, robust organic growth, and stock buybacks, the company currently displays a 5-year EPS CAGR of 20%. This is quite impressive, considering its sheer size.

Additionally, by accumulating $136B of cash in its balance sheet, the company should not face any sort of liquidity problems.

Fiserv (FISV) 

Despite Fiserv’s higher retail-merchant exposure, revenue growth remained robust during the year at 21%, pushing revenues to a new annual high at $14.85 billion. The world’s total GPV is ~ $235 trillion, which is three times larger than the total global GDP. With a fraction of the total GPV being processed through cards, online payments as a part of card payments are growing at an outrunning pace.

Therefore, Fiserv’s merchant-oriented services in the industry should benefit from significant organic growth moving forward.

Melvin trimmed its position in Fiserv by 17%, though it is still its 8th largest position.

Advanced Auto Parts (AAP)

A surprising position, as it is not found in the most significant positions of hedge funds, is Advanced Auto Parts, in which the company decreased its position by around 25% during the quarter. Because Advanced Auto Parts is not a huge company, Melvin’s ~ $435 million worth of equity stake indicates total ownership of around 4% of the company’s shares outstanding.

The company is paying a tiny dividend as it prefers to return most of its net income to shareholders in the form of stock buybacks. Hence, while revenues and net income have been stagnant for years, EPS has been growing, helping advance the stock higher over time.

With consumers’ purchasing power remaining compressed amid the ongoing pandemic, it’s likely that AAP’s automotive replacement parts, accessories, batteries, will remain in high demand. Hence, the company enjoys a significant positive demand catalyst as of now.

Final Thoughts

Melvin Capital seeks to generate strong risk-adjusted returns by focusing on fundamental characteristics that support future growth. The firm’s long-term performance has been strong, but its portfolio is not as diversified as perhaps some investors would like, and it is not focused on dividend-paying stocks. The firm’s performance over the long-term has been quite strong and has made its founder, Gabriel Plotkin, a billionaire.

Investors following Melvin Capital’s 13F filings would do well to consider the relatively high concentration of its top 10 holdings, and high exposure to tech stocks.

However, for investors seeking growth stocks, Melvin Capital’s history of returns warrants a closer look at its holdings for potential investment ideas.

You can download an Excel spreadsheet with metrics that matter of Melvin Capital’s current 13F equity holdings below:

 

Additional Resources:

Slate Path Capital’s 20 Stock Portfolio: Top 10 Holdings Analyzed

Akre Capital’s 26 Stock Portfolio: Top 10 Holdings Analyzed

Appaloosa Management’s 35 Stock Portfolio: Top 10 Holdings Analyzed

Viking Global’s 75 Stock Portfolio: Top 10 Holdings Analyzed

Lone Pine Capital’s 37 Stock Portfolio: Top 10 Holdings Analyzed

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