Melvin Capital’s Stock Holdings & Investment Strategy

Updated October 9th, 2020 by Nikos Sismanis

Melvin Capital Management LP is a registered investment advisor that is 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 $13 billion in the six 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-August, 2017 through mid-August 2020) would have generated annual total returns of 15%. This is above the S&P 500’s annualized total returns of 11.9% 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 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 types of 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 Stock Investments

Melvin Capital’s Stock Investments

As of its August 2020 13F filing, Melvin Capital had 80 total reported positions in US equities for a total market value of $17 billion. That’s 30 more individual holdings than last quarter, implying that the fund has diversified its portfolio further.

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

Fiserv (FISV) & PayPal (PYPL)

Betting heavily on the payment-processing market, Melvin increased its position in Fiserv and PayPal by 262% and 30%, respectively. The two holdings account for around 10% of its holdings, with Fiserv actually being its greatest holding, with a 7.3% total exposure.

Unlike PayPal, which has been greatly benefited by COVID-19’s boost in e-commerce, having its shares currently at all-time highs, Fiserv was negatively affected during the pandemic. The reason is that the company has a higher retail merchant-exposure, and as a result, ended Q2 barely profitable. As a result, the company’s shares still trade around 20% lower to its pre-COVID-19 levels.

We believe that Melvin’s capital allocation aims to capture both the trend of e-commerce payments through PayPal and the Fiserv’s attractive valuation in hopes for a quick post-pandemic rebound, hence hedging its sector exposure.

Booking Holdings (BKNG) & Expedia (EXPE)        

Both Booking and Expedia have been adversely impacted by COVID-19, as travel restrictions and the staying-at-home economy have collapsed the demand for booking hotels, car rentals, and table reservations. As a result, both stocks lost almost half of their value during the pandemic.

During Q1, Melvin massively doubled down on Expedia, increasing its position by +460%. With share rebounding during Q2, the fund trimmed its position by around 9%, booking some quick gains, while still holding a big position of 7.7 million shares or around 4.9% of its holdings.

When it comes to Booking, Melvin apparently projects that the stock has further room to run. Management boosted its stake by a massive 57%, making the stock its third-largest position, occupying around 6.6% of its portfolio.

It’s also worth noting that Melvin collectively holds around $650 million in Booking and Expedia calls, respectively, further highlighting its estimates for a quick recovery in the tourism and travel industries.

AutoZone (AZO) & Advanced Auto Parts (AAP)

A surprising position, as it is not found in the most significant positions of hedge funds, is AutoZone, which the company increased its position by around 38% during the quarter. Because AutoZone is not a huge company, Melvin’s nearly $1 billion worth of stake indicates total ownership of around 3.7% of the company’s shares outstanding.

We believe that the company is a high-conviction pick of Melvin, as it showcases robust financials and a massive focus on shareholder returns. The company’s revenues hit a recent all-time high during the pandemic, while its bottom line achieved record quarterly net income of $740 million, despite COVID-19.

Further, AutoZone’s management has a long-term record of stock buybacks, historically utilizing the majority of the company’s cash flows to buy back shares. Over the past 20 years, the company has repurchased and retired around 85% of its shares outstanding, which is utterly amazing.

The combination of strong profitability and robust shareholder returns is probably greatly appreciated by Melvin – hence its large stake.

To further boost its position in the automotive replacement parts market, Melvin also increased its position in Advanced Auto Parts by 16%, whose operations are similar to those of AutoZone. The company is paying a tiny dividend and accounts for around 3% of the company’s holdings.

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. With shares trading at a discount, Melvin doubled its position during the past quarter. Since then, their value has more than doubled, marking a massively successful bet.

While the fund’s position has been paying off greatly, it’s worth noting that the company is facing massive liquidity risks, which investors must be wary of before allocating capital towards a retail-focus company.

Amazon.com (AMZN) & JD.com (JD) & Alibaba (BABA)

Last but not least, Melvin is holding significant positions in the e-commerce giants Amazon, JD, and Alibaba, which collectively account for around 16% of its holdings. It seems like the company wants to gain e-commerce exposure in all three major industry leaders.

While Amazon and Alibaba were trimmed by around 34% and 16%, respectively, we believe that these trades were mostly for rebalancing purposes, as both positions had grown to be too massive. Alibaba is still Melvin’s second-largest holding, accounting for around 7.1% of its funds.

At the same time, the company used some of the gains from this divestment to acquire more shares of the smaller, but rapidly growing company, JD. Its shares have almost quadrupled since 2018, being on the fastest-growing e-commerce logistics company in China.

With COVID-19 remaining strong and active, we believe that all Melvin’s e-commerce picks should end up proving fruitful returns In the future.

___

Only 36 of the 80 equity positions reported are dividend-paying stocks, and most are generally near or below the yield of the broader market, as measured by the S&P 500.

Melvin Capital’s strategy is more focused on capital appreciation potential than dividend stocks, with Expedia being its largest dividend-paying holding. That stock yields just 1%, and its second-largest dividend-paying position is L Brands (LB), which yields just 2%.

Final Thoughts

Melvin Capital seeks to generate strong risk-adjusted returns over the long-term 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: