2019 Review: Most Favored Hedge Fund Stocks vs. Square, Inc. (SQ)

We are still in an overall bull market and many stocks that smart money investors were piling into surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained more than 57% each. Hedge funds’ top 3 stock picks returned 44.6% this year and beat the S&P 500 ETFs by almost 14 percentage points. That’s a big deal. This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Is Square, Inc. (NYSE:SQ) the right pick for your portfolio? Money managers are taking a bearish view. The number of long hedge fund positions retreated by 9 in recent months. Our calculations also showed that SQ isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

To most market participants, hedge funds are assumed to be worthless, outdated investment vehicles of years past. While there are greater than 8000 funds in operation at the moment, We choose to focus on the crème de la crème of this group, approximately 750 funds. Most estimates calculate that this group of people manage bulk of all hedge funds’ total capital, and by shadowing their matchless stock picks, Insider Monkey has unsheathed a number of investment strategies that have historically outperformed Mr. Market. Insider Monkey’s flagship short hedge fund strategy outstripped the S&P 500 short ETFs by around 20 percentage points annually since its inception in May 2014. Our portfolio of short stocks lost 27.8% since February 2017 (through November 21st) even though the market was up more than 39% during the same period. We just shared a list of 7 short targets in our latest quarterly update .

Andreas Halvorsen

Andreas Halvorsen of Viking Global

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Now we’re going to analyze the fresh hedge fund action surrounding Square, Inc. (NYSE:SQ).

What have hedge funds been doing with Square, Inc. (NYSE:SQ)?

Heading into the fourth quarter of 2019, a total of 44 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -17% from the second quarter of 2019. By comparison, 23 hedge funds held shares or bullish call options in SQ a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Andreas Halvorsen’s Viking Global has the largest position in Square, Inc. (NYSE:SQ), worth close to $621.4 million, accounting for 3.2% of its total 13F portfolio. Sitting at the No. 2 spot is Lone Pine Capital, holding a $496.2 million position; 2.9% of its 13F portfolio is allocated to the stock. Other hedge funds and institutional investors that hold long positions encompass Philippe Laffont’s Coatue Management, Brian Bares’s Bares Capital Management and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position ThornTree Capital Partners allocated the biggest weight to Square, Inc. (NYSE:SQ), around 10.07% of its 13F portfolio. Bares Capital Management is also relatively very bullish on the stock, earmarking 9.04 percent of its 13F equity portfolio to SQ.

Because Square, Inc. (NYSE:SQ) has witnessed declining sentiment from hedge fund managers, we can see that there exists a select few fund managers that slashed their positions entirely in the third quarter. At the top of the heap, Josh Resnick’s Jericho Capital Asset Management sold off the biggest stake of the “upper crust” of funds tracked by Insider Monkey, valued at close to $78.8 million in stock. Alex Sacerdote’s fund, Whale Rock Capital Management, also said goodbye to its stock, about $52 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest fell by 9 funds in the third quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Square, Inc. (NYSE:SQ) but similarly valued. We will take a look at Southern Copper Corporation (NYSE:SCCO), Telefonaktiebolaget LM Ericsson (publ) (NASDAQ:ERIC), AutoZone, Inc. (NYSE:AZO), and FirstEnergy Corp. (NYSE:FE). This group of stocks’ market caps are similar to SQ’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SCCO 13 175117 -2
ERIC 20 352546 1
AZO 35 1328778 -2
FE 32 2451597 -2
Average 25 1077010 -1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 25 hedge funds with bullish positions and the average amount invested in these stocks was $1077 million. That figure was $2375 million in SQ’s case. AutoZone, Inc. (NYSE:AZO) is the most popular stock in this table. On the other hand Southern Copper Corporation (NYSE:SCCO) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks Square, Inc. (NYSE:SQ) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately SQ wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on SQ were disappointed as the stock returned 12% so far in 2019 (through 12/23) and trailed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 65 percent of these stocks already outperformed the market in 2019.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Disclosure: None. This article was originally published at Insider Monkey.