The last five years have been chaotic, with a global pandemic, a presidential election, inflation, rapid interest rate changes, bank failures and more. Despite this level of economic disruption, S&P 500 is up almost 90%. That’s a good run, all things considered.
As good as these broad market returns have been, Free Market (NASDAQ: MELI) stock has left the S&P 500 in the dust. Shares of this Latin American company have risen more than 280% in the past five years.
MercadoLibre is the largest position in my personal Roth IRA, and I’ll explain why in a moment. But first, let me provide some context to avoid any potential misunderstandings.
My Roth IRA is less than five years old. I previously had a retirement account with my employer. I had no control over how that account was invested. But when I changed jobs, I rolled the account over and suddenly had investable money and decision-making power.
I quickly diversified the account into more than 20 stock positions, because diversification matters — it’s a core Motley Fool investing tenet. In early 2022, I purchased shares of MercadoLibre for the first time, applying dollar-cost averaging to my new position until it was worth about 5% of the value of the Roth IRA.
It wasn’t the largest position at the time, but MercadoLibre shares certainly hold that title now. They are worth much more than 5% of the total portfolio value. However, there are three reasons why I don’t plan on selling MercadoLibre shares anytime soon.
1. MercadoLibre is poised for growth
Investors can make money in low-growth sectors. But it’s much easier to find winning investments by focusing on leaders in growing markets.
In the case of MercadoLibre, its two main business segments are e-commerce marketplace and financial technology (fintech) services. Competition would be much fiercer in North America or Europe. But in its home country of Latin America, MercadoLibre enjoys a leading position thanks to its early entry into the space.
In terms of market maturity, Latin American markets for e-commerce and digital financial products are generally younger than those in North America. This partly explains why MercadoLibre’s growth has been so great and why it could continue to be strong for the foreseeable future.
In terms of growth rate, the chart below shows that MercadoLibre’s slowest growth rate over the past five years was 36% — most companies rarely have a year of growth this good. And MercadoLibre has averaged nearly 60% top-line growth over that period. At this rate, the company will quadruple in size every three years, which is simply staggering.
I’m not necessarily saying MercadoLibre will continue at this pace. But it still seems to have plenty of room to grow, which is the main reason I’m glad MercadoLibre stock is the largest position in my Roth IRA.
2. MercadoLibre is about to make a profit
Many years ago, MercadoLibre decided to sacrifice its good profit margins to invest in shipping and logistics. In its regions, logistics was the challenge that few companies were looking for a solution to. It was not fast, cheap or easy. But today, MercadoLibre has impressive capabilities.
By comparison, more than half of orders on MercadoLibre’s e-commerce platform are delivered the same day or the next day, a rare level of service in the company’s key markets.
The strength in logistics supports the long-term growth of MercadoLibre’s e-commerce marketplace. Not only are more third-party sellers on board (creating a high-margin revenue stream), but the platform’s growth is also driving growth in advertising revenue. The company had about $250 million in advertising revenue in the second quarter of 2024, up more than 50% year-over-year.
In addition, MercadoLibre’s strong logistics position provides a competitive advantage. Companies with a strong advantage often find ways to improve their margins over time.
Over the past few years, MercadoLibre’s revenue growth has been excellent. But as the chart below shows, growth in profit metrics like operating profit and free cash flow has been even better.
I expect more gains for MercadoLibre shares if profits continue to grow as they are now.
3. Letting winners run is a winning strategy
One principle of investing the Motley Fool way is to have a diversified portfolio. Another principle is to let a winning investment run, rather than selling it prematurely.
Let’s face it, a diverse portfolio is going to be filled with a lot of bad investments — mine certainly was. This can drag down overall long-term returns. However, a single winning stock can do the heavy lifting. But this can only happen if it’s given enough time to grow.
There are legitimate reasons to sell a stock. But MercadoLibre’s business is booming and it looks like it has a long way to go. For these reasons, I’m going to hold on to my top stock and let it boost my portfolio as a whole.
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Jon Quast has positions in MercadoLibre. The Motley Fool has positions in and recommends MercadoLibre. The Motley Fool has a disclosure policy.
This Monster Growth Stock Is Up Nearly 300% In 5 Years. Here’s Why It’s The Biggest Stock Position In My Portfolio Right Now was originally published by The Motley Fool
