We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds’ top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Southwest Gas Holdings, Inc. (NYSE:SWX).
Is Southwest Gas Holdings, Inc. (NYSE:SWX) the right investment to pursue these days? Prominent investors are buying. The number of bullish hedge fund bets went up by 4 lately. Our calculations also showed that SWX isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). SWX was in 20 hedge funds’ portfolios at the end of the third quarter of 2019. There were 16 hedge funds in our database with SWX holdings at the end of the previous quarter.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s review the fresh hedge fund action surrounding Southwest Gas Holdings, Inc. (NYSE:SWX).
What does smart money think about Southwest Gas Holdings, Inc. (NYSE:SWX)?
At Q3’s end, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of 25% from the second quarter of 2019. On the other hand, there were a total of 13 hedge funds with a bullish position in SWX a year ago. With hedgies’ capital changing hands, there exists a select group of noteworthy hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).
More specifically, Adage Capital Management was the largest shareholder of Southwest Gas Holdings, Inc. (NYSE:SWX), with a stake worth $106.4 million reported as of the end of September. Trailing Adage Capital Management was GAMCO Investors, which amassed a stake valued at $67.4 million. AQR Capital Management, Millennium Management, and Renaissance Technologies were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position GAMCO Investors allocated the biggest weight to Southwest Gas Holdings, Inc. (NYSE:SWX), around 0.56% of its 13F portfolio. Adage Capital Management is also relatively very bullish on the stock, designating 0.26 percent of its 13F equity portfolio to SWX.
As industrywide interest jumped, key money managers have jumped into Southwest Gas Holdings, Inc. (NYSE:SWX) headfirst. Tudor Investment Corp, managed by Paul Tudor Jones, initiated the largest position in Southwest Gas Holdings, Inc. (NYSE:SWX). Tudor Investment Corp had $1.5 million invested in the company at the end of the quarter. David E. Shaw’s D E Shaw also made a $0.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Karim Abbadi and Edward McBride’s Centiva Capital, Matthew Tewksbury’s Stevens Capital Management, and Michael Platt and William Reeves’s BlueCrest Capital Mgmt..
Let’s also examine hedge fund activity in other stocks similar to Southwest Gas Holdings, Inc. (NYSE:SWX). We will take a look at MasTec, Inc. (NYSE:MTZ), Churchill Downs Incorporated (NASDAQ:CHDN), MAXIMUS, Inc. (NYSE:MMS), and Millicom International Cellular S.A. (NASDAQ:TIGO). This group of stocks’ market caps are closest to SWX’s market cap.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.5 hedge funds with bullish positions and the average amount invested in these stocks was $312 million. That figure was $253 million in SWX’s case. MasTec, Inc. (NYSE:MTZ) is the most popular stock in this table. On the other hand Millicom International Cellular S.A. (NASDAQ:TIGO) is the least popular one with only 6 bullish hedge fund positions. Southwest Gas Holdings, Inc. (NYSE:SWX) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately SWX wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); SWX investors were disappointed as the stock returned -16.2% during the first two months of the fourth quarter and underperformed 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.