Melvin Capital's 55 Stock Portfolio: Top 10 Holdings Analyzed - Sure Dividend

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Melvin Capital’s 55 Stock Portfolio: Top 10 Holdings Analyzed


Updated on September 17th, 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 $24.5 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 $1 billion. 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-August 2018 through mid-August 2021) would have generated annual total returns of 21.94%. This is above the S&P 500’s annualized total returns of 18.08% 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 all of their assets substantially through the master funds.

Melvin Capital’s Portfolio and Top Holdings

As of its August 2021 13F filing, Melvin Capital had 55 total reported positions in US equities for a total market value of $17.4 billion. That’s 1 fewer individual holdings than last quarter, implying that the fund is concentrating its portfolio. The portfolio is now more concentrated, with Consumer Discretionary, Technology, and Communications covering the majority of its sector exposure.

Source: Company filings, Author

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

Noteworthy New Buys:

Noteworthy New Sells:

The fund closed more positions than it initiated, but the portfolio remains quite diversified. Its largest position, Expedia Grop (EXPE), accounts for 7.9% of the portfolio, while its top 10 ten holdings account for just under 50% of the total portfolio weight.

Source: Company filings, Author

Melvin’s top 10 holdings as of its latest 13F filing are the following:

Expedia (EXPE):

Travel-industry service provider Expedia was a primary victim of COVID-19. It is Melvin’s largest position. Travel restrictions and the stay-at-home economy collapsed the demand for booking hotels, car rentals, and table reservations. As a result, the company saw its revenues more than halve during 2020. Recovery has so far been humble.

During the latest quarter, Melvin increased its position in Expedia by 22%, likely due to its depressed price. Q2 revenues grew by 272.8% to $2.11 billion, while bookings increased by 667% to $20.8 billion, following a robust recovery from the midst of the pandemic last year.

Considering that the stock accounts for around 7.9% of the total portfolio, Melvin seems to remain confident about Expedia’s long-term prospects.

Amazon (AMZN):

Being one of the five companies in the trillion-dollar-market-cap club, the company is currently the fourth-largest in the world, worth around $1.66T. As the company’s continuous advancements keep on taking over the world both in terms of its commerce and digital infrastructure, Amazon has become an unstoppable force, causing its stock to maintain substantial investor demand.

However, investors should not expect a dividend from Amazon anytime soon.

Amazon delivered another solid quarter recently, with Q2 AWS net sales up 37% YoY to $14.81 billion, topping the $14.1 billion consensus estimate. Revenues grew to $113.1 billion, a 27.2% increase YoY, contributing to all-time high LTM (last twelve months) sales of $443.3 billion.

Due to scaling its operations, the company’s net income margins have constantly been evolving, reaching 6.64% during this period, turning Amazon into an increasingly profitable growth monster. The stock is currently trading at a forward P/E of 59.2, but considering its EPS growth, it could be a reasonable valuation multiple.

The stock accounts for 5.6% of Melvin’s portfolio.

Visa (V) & MasterCard (MA):

One can find Visa and MasterCard among many hedge funds’ top positions. Visa is Melvin’s third-largest holding but has also a small position in MasterCard. The two companies have effectively monopolized the sector, with every bank utilizing their networks for consumers across the globe to complete their everyday transactions.

While both companies were hit hard by COVID-19, as consumer spending drastically fell during the early months of the pandemic, their latest operating metrics indicate complete recovery, with signs of growth resuming, due to a massive shift towards e-commerce transactions.

This shift should also have substantial positive effects on their long-term cash flows, as both Visa and MasterCard charge merchants double the rates for CNP (Card-Not-Present) transactions, as online sales have higher risks involved.

While cross-border volumes remain depressed due to strict traveling restrictions, we believe that the long-term shift of consumer spending in e-commerce will more than compensate for the current challenges. Therefore, the duo’s long-term growth story remains intact.

The fund trimmed its Visa and MasterCard positions by 9% and 65%, respectively, during the quarter.

Despite their miniature yield, Visa and MasterCard are rapid dividend growers, advancing their dividend payments at double-digit rates each year.

Laboratory Corporation of America Holdings (LH):

Laboratory Corporation of America Holdings functions as a clinical laboratory business globally. While not a pharma company producing direct therapies, Labcorp is paid to conduct clinical trials. Benefiting from a growing industry, revenues grew 38.6% to $3.84 billion last quarter, with the company raising its adjusted EPS guidance to $21.50 to $25.00 ($22.65 consensus).

Shares are trading at 17.6 times their forward net income, which is a rather reasonable multiple considering Labcorp produces stable and growing cash flows.

Labcorp is Melvin’s fourth-largest holding.

Align Technology, Inc. (ALGN):

Align Technology medical device company that designs and manufactures Invisalign clear aligners for orthodontists and as well as other tools for dentists. The company has managed to grow rapidly over the past few years as an increasing number of people have been investing in a better-looking smile.

Melvin has been invested in Align for around a year now. It increased its stake by 68% during the previous quarter and is now the fund’s fifth-largest holding.

Fair Isaac Corporation (FICO):

Fair Isaac develops analytic, software, and data management products and services that empower businesses to automate, improve, and correlate decision-making internationally. Melvin initially invested in the stock in Q4-2019, having slowly accumulated a larger position, currently owning around 3.4% of the company.

In August, Fair Isaac reported its Q3-2021 results, growing its top line by 7.8% to $338.1 million. Net income for the quarter totaled $151.2 million, or $5.18 per share, versus $64.1 million, or $2.15 per share in the prior-year period.

While the company’s performance has constantly been developing, its valuation has also been expanding. At over 32 times its forward net income, the market has priced in much of the stock’s future potential. Therefore, current investors have a thinner margin of safety, and likely a softer total return potential than a few years ago.

Melvin trimmed its position by 15% during the quarter.

PagSeguro Digital Ltd. (PAGS):

PagSeguro specializes in implementing financial technology primarily to small and medium-sized merchants in Brazil. Its end-to-end digital ecosystem allows its customers to accept payments and also control their business’s operations. The ecosystem comprises products such as payment processing, POS devices, and the issuance of payment cards. The great thing in PagSeguro’s field of operations is that the Brazilian population is massively unbanked.

Melvin hiked its stake by 106% during the quarter. PagSeguro is now the fund’s seventh-largest position.

Alphabet (GOOGL):

Alphabet, Google’s parent company, occupies around 3.5% of Melvin’s holdings. The fund trimmed its position by 38% during the quarter. Alphabet is now Melvin’s eighth-largest holding.

The company has become increasingly more attractive to investors, following Alphabet posting fantastic financials and robust growth consistently. Revenue growth has re-accelerated, with its most recent quarter posting growth of nearly 35%.

Net margins are above 25%, while revenue has seen uninterrupted growth. However, Alphabet still does not pay a dividend.

As a result of steady, robust organic growth, and stock buybacks, the company displays a 5-year EPS CAGR of 58.49%. This is quite impressive, considering its sheer size.

The company is one of the most attractively priced stocks in the sector as well, trading at around 27.2 times its forward earnings, despite its consistent growth, massive moat, and strong balance sheet. By accumulating $135.8 billion of cash on its balance sheet, the company should not face any sort of liquidity problems.

JD.com, Inc. (JD):

JD.com is China’s largest online retailer. The company has a customer-centric mentality, much like Amazon, striving to offer the best online shopping experience possible. JD.com is Melvin’s ninth-largest holding, despite the fund initiating the position just last quarter. The stock has recently suffered due to the Chinese government’s crackdown on big tech. Still, shares are trading at around 54 times their next year’s earnings, with investors having strong expectations on the company’s profitability expansion.

JD.com is Melvin’s ninth-largest holding. It is an entirely new position for the fund.

IAA, Inc. (IAA):

IAA offers auction solutions for damaged, and low-value vehicles. The company’s platform accommodates the marketing and sale of such vehicles for a wide spectrum of sellers. IAA is Melvin’s tenth-largest holding. The top & bottom lines have been growing relatively consistently, while the stock is rather attractively priced in its industry at around 22.6 its future net income.

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:

Pershing Square: Bill Ackman’s 7 Stock Market-Beating Portfolio

Bridgewater Associates’ 411 Stock Portfolio: Top 10 Holdings Analyzed

Appaloosa Management’s 40 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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