The anchoring bias is a pretty cruel mechanism. In investing, this happens when we "anchor" to the price of a stock at a given time -- and use that as a reference point out into the future. Last year, I missed out buying my top stock to buy in January because Motley Fool trading rules prohibited me from buying shares. When my window opened up, I simply forgot to act.
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This January, don't make the same mistake!
Image source: Getty Images.
In the six months following my gaffe, shares doubled in value. As a result, it'd be easy to feel like I "missed the boat." But in an effort to combat anchoring bias in my own life, I'm calling out shares of Latin American e-commerce King Mercadolibre (NASDAQ: MELI) as my top stock to buy in January 2017.
A widening moat on all fronts
At its core, Mercadolibre provides an auction site where registered users can buy and sell things, as well as a payment solution -- MercadoPago -- to facilitate these transactions. Increasingly, the latter has become the growth driver as more and more merchants outside of the auction site sign up to use MercadoPago to process payments.
The company generally reports results in two business segments: marketplace and non-marketplace. The former includes MercadoPago's services but focuses more on the up-front fees users have to pay to buy and sell things on the company's platform. The latter includes off-platform MercadoPago payments as well as the company's advertising business. A peek at results over the past three-plus years shows where revenue growth is coming from.
Data source: SEC filings.
While the marketplace's growth over time has certainly been solid, it's non-marketplace revenue that's been booming. Since 2013, it has grown by 35% per year, and management thinks this could just be the tip of the iceberg.
The crucial thing to understand here is that both businesses -- the auction site and the payment system -- benefit from one of the strongest moats a company can have: the network effect.
For the auction site, the more people who are selling things, the more motivation a buyer has to become a user. The more buyers who become users, the more motivation sellers have to list things on the platform. It's a virtuous cycle that has played out over time as the number of confirmed registered users has grown steadily over time.
By the same token, the more people who use MercadoPago to pay for things, the more likely merchants are to accept it as a form of payment. And...you guessed it...the more merchants that accept it as a form of payment, the more people are incentivized to use it.
Data source: SEC filings.
Invest with those who have their skin in the game
I have been deeply influenced by the writings of trader, professor, and philosopher Nassim Taleb -- author of The Black Swan, Fooled by Randomness, and Antifragile: Things that Gain from Disorder. One of the key tenets to his writing is that the world is far, far more complex than we think it is.
But instead of throwing our hands up at the futility of understanding the world, he offers a simple solution: Make sure that the people who truly understand the risks of what they're doing have their own skin in the game. He references time in antiquity when bridge-makers were forced to sleep underneath their bridges. I couldn't think of a simpler, more effective way of dealing with hidden risks.
By the same token, I want to invest in companies where management has their own skin in the game. Mercadolibre's CEO -- who also happens to be its founder -- is Marcos Galperin. Through a trust, he owns almost 10% ofshares outstanding. That gives me confidence that he is running the company to create long-term value for all stakeholders.
A massive opportunity
My family spends half of the year living in Central America -- on a Costa Rican coffee farm to be exact. While Costa Rica itself isn't a major player within Mercadolibre's ecosystem, I've been able to see -- firsthand -- how the middle class and internet penetration are growing in Latin America.
I also have the numbers to back it up. HumanProgress estimates that by 2014, only half of South American citizens had internet usage, and just over one-third of Central America was connected.
Data source: HumanProgress
Currently, Brazil, Argentina, Venezuela, and Mexico are the most important countries for the company's bottom line. All four have higher Internet-penetration rates than the regions they are in -- which means that as more citizens come online in the region's other countries, the opportunity will only grow.
It isn't that expensive
Go to any finance site, and it will tell you that Mercadolibre is expensive. Some list the price-to-earnings ratio as high as 63. But there's much more to it than that. For starters, the company is trading for just 30 times free cash flow -- which I consider to be a more-than-reasonable price tag for a company growing so quickly.
But more importantly, currency headwinds are really holding things back. Consider how each of the four aforementioned countries' Marketplace revenues performed during 2015 for Mercadolibre, in local currencies versus U.S. dollars -- which is how the company reports results.
Data source: SEC filings.
No one can tell you with any certainty where foreign exchange rates will head in the future, but I like to think that when a company is held down by such headwinds, it's a buying opportunity. In the long run -- I'm talking decades, here -- I like to believe that such changes tend to smooth out.
I don't know if that will be the case, here, but I'm willing to put my money behind a company that might look expensive, but is actually very cheap for those with a long enough time horizon.
That, plus the three other benefits -- the powerful network effects, management with skin in the game, and citizens who are rapidly going online -- give me confidence in declaring that Mercadolibre is my stock to buy for January. And lest you think these are empty words, recent purchases have pushed this company up to 3.5% of my family's real-life holdings.
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