Sometimes, it's a good practice to rank the stocks in your portfolio by conviction. At the top of the list should be your must-own stock, and if you were forced only to own one, that would be it. While only owning one stock is a hypothetical scenario, it reveals a lot about the qualities you look for as an investor.
Additionally, your highest-conviction stock should likely make up a large part of your portfolio; if it doesn't, you should consider adding to it (although it doesn't necessarily have to be the largest component). My top stock and largest holding coincide, so this isn't an issue for me. MercadoLibre (MELI 3.09%) is my top stock, and I think that after learning more about it, many investors would also consider ranking it near the top of their lists.
A combination of two strong business models
Although MercadoLibre is listed on the Nasdaq Stock Market, it's a Latin American company. It's divided into two wings: fintech and commerce. The commerce side is a lot like Amazon with an online store and a delivery service. The fintech side is more like PayPal Holdings with its Mercado Pago system acting as a digital wallet that consumers can use to pay for goods or send money to peers.
With these two segments, MercadoLibre created the go-to commerce system in Latin America. Its market dominance is unparalleled, and MercadoLibre operates in an area of 18 countries with a population much larger than the U.S.
However, Latin American countries aren't as stable as the U.S., so this is a risk investors must consider. But because MercadoLibre is diversified across multiple countries, it's less risky than if it were concentrated on one country. Still, the majority of the company's business comes from three countries: Argentina, Brazil, and Mexico.
If something happens with one of these countries, MercadoLibre's investment thesis could be in trouble. However, the company has weathered the storm even as Argentina deals with an inflation crisis. Overall, MercadoLibre's offering is incredibly powerful, and the financial results back up this claim.
Unbelievable growth at a reasonable price
It's practically impossible to find a fault in MercadoLibre's third-quarter results. On the commerce side, revenue was up 76% year over year on a currency-neutral basis. This was powered by selling 26% more goods and gross merchandise volume rising 59%.
Fintech wasn't quite as strong as commerce, but with revenue still rising a currency-neutral 61% year over year, it's nothing to be disappointed in. Unique active users rose from 41.6 million to 48.8 million in one year, and total payment volume increased from $32.2 billion to $47.3 billion.
While revenue is increasing rapidly, MercadoLibre's profits are increasing even faster. By being disciplined with expenses and releasing some of its loan loss provisions, MercadoLibre grew its operating profit margin from 11% last year to 18.2% this year. This helped earnings per share (EPS) explode from $2.57 to $7.18, marking MercadoLibre's impressive profitability.
Despite all of these fantastic results, plus the upside of operating in a growing region like Latin America, the stock trades at levels not seen since the Great Recession of 2008 and 2009.
MELI PS Ratio data by YCharts
MercadoLibre is a rare combination of impressive growth at a fair price, making it my top stock to own right now. While there is some risk with currency exchange and other events out of the company's control, the upside is too great to ignore MercadoLibre's stock.
