Melvin Capital’s Stock Holdings & Investment Strategy

Updated January 7th, 2020 by Nikolaos 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 $20 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-November, 2017 through mid-November 2020) would have generated annual total returns of 15.8%. This is above the S&P 500’s annualized total returns of 12.20% 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 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 portfolio and top holdings

As of its November 2020 13F filing, Melvin Capital had 72 total reported positions in US equities for a total market value of $20.5 billion. That’s 8 fewer individual holdings than last quarter, implying that the fund is concentrating its holdings, doubling-down on its existing positions. Still, the portfolio is quite diversified. Its largest position, Adobe, accounts for 8.6%, while its top 10 ten holdings account for around 50% of its holdings.

Source: Company filings, Author

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

Fiserv (FISV) 

Betting heavily on the payment-processing market, Melvin increased its position in Fiserv once again, this time by 26%. The position accounts for around 8.6% of its portfolio. 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. However, in Q3, the company made a sweet comeback, delivering a bottom line of $264 million. It seems that Melvin’s bet in doubling down to the stock is paying off nicely.

It’s worth mentioning that the company also had a significant position in another fintech company, Paypal, which was sold off almost completely.

Booking Holdings (BKNG) & Expedia (EXPE)        

Both Booking and Expedia were 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.

Since then, the two stocks, which make for Melvin’s second and third most significant holdings have recovered relatively nicely. During the latest quarter, Melvin increased its position in Expedia and Melvin by 32% and 14%, respectively, once again showing its conviction towards the quick recovery of the travel and tourism industry.

Alibaba (BABA)

Chinese internet giant Alibaba is Melvin’s 4th largest position and its greatest exposure in the e-commerce world. While Alibaba has been growing rapidly, delivering massive profits in each and every quarter, its China-related issues have kept the stock’s valuation quite depressed. Investors should be aware of the ongoing risks, including the fact that $BABA does not represent shares in the company, but on a Cayman-based shell corporation, as well as the recent news that its founder and major shareholder Jack Ma has been missing for months.

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.

Melvin increased its equity stake in the company by 173%, betting heavily on the stock’s future growth. Investors should note, however, that Pinterest is wildly unprofitable, trading at quite an extended valuation. Still, it makes for a compelling bet, that could end up becoming one of the next big social networks. Its gross margins remain quite juicy as well, which means that a positive bottom line should be quite easy to achieve once the company cuts down its massive expenditures.

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 quite a nice profit on the way back up. The fund trimmed its position by around 12% during the last quarter, likely to take some profits off the table.

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-focused company.

Visa (V)

One of the most successful tech companies of the last decade, Visa is Melvin’s 7th largest position. The global payment processor, along with its buddy Mastercard, has essentially monopolized the industry. Visa is enjoying a massive moat, juicy margins, while run by a world-class management team that puts great effort and care towards maximizing shareholders’ returns. While the stock has lagged as of late, due to COVID-19’s effects on the retail card-processing side of the business, Visa remains an excellent long-term holding.

Melvin’s high conviction in the company remains, as the fund increased its position by 61% during the last quarter.

Las Vegas Sands Corp. (LVS)

Las Vegas Sands Corp develops, owns, and operates integrated resorts in Asia and the United States. The company’s operations were decimated by COVID-19, essentially shutting down its casinos and resorts. Melvin’s recent position increase by 67% indicates another “distressed-situation” holding, which the fund expects to recover soon. It is worth noting that despite LVS’s top line suffering by almost 90% due to the ongoing pandemic, its stock has remained relatively resilient, due to its otherwise high-quality management and AAA locations.

ServiceNow (NOW)

Enterprise cloud computing solutions-giant ServiceNow is Melvin’s 9th largest position, which was increased by 63% during the last quarter.  The company has been growing consistently, delivering great results one quarter after the other. As a result, the stock has been on a non-stop bull-run for nearly 10 years. Melvin has been holdings the stock since 2017, which means that due to its recent stake increase management believes that shares still remain attractively priced, despite their all-time high trading levels.

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 slightly decreased its position by around 3% during the quarter. Because AutoZone is not a huge company, Melvin’s ~ $640 million worth of stake indicates total ownership of around 4.5% of the company’s shares outstanding.

The company is paying a tiny dividend and accounts for around 3% of the company’s holdings as it prefers to return most of its net income to shareholders in the form of stock buybacks. With consumers’ purchasing power remaining compressed amid the ongoing pandemic, it’s likely that AAP’ automotive replacement parts, accessories, batteries, will remain in high demand, against new car purchases. Hence, the company enjoys another positive catalyst as of now.

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: