Is Square (SQ) A Good Stock To Buy Now?

The 800+ hedge funds and famous money managers tracked by Insider Monkey have already compiled and submitted their 13F filings for the third quarter, which unveil their equity positions as of September 30. We went through these filings, fixed typos and other more significant errors and identified the changes in hedge fund portfolios. Our extensive review of these public filings is finally over, so this article is set to reveal the smart money sentiment towards Square, Inc. (NYSE:SQ).

Is Square, Inc. (NYSE:SQ) a good stock to buy now? SQ was in 73 hedge funds’ portfolios at the end of September. The all time high for this statistics is 66. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. SQ investors should pay attention to an increase in hedge fund sentiment of late. There were 66 hedge funds in our database with SQ holdings at the end of June. 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 for a quick look at the top 5 stocks).

Video: 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 S&P 500 ETFs by more than 66 percentage points since March 2017 (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.

COATUE MANAGEMENT

Philippe Laffont of Coatue Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets. Tesla’s stock price skyrocketed, yet lithium prices are still below their 2019 highs. So, we are checking out this lithium stock right now. We go through lists like the 15 best blue chip stocks to buy to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. With all of this in mind let’s take a look at the recent hedge fund action surrounding Square, Inc. (NYSE:SQ).

How are hedge funds trading Square, Inc. (NYSE:SQ)?

At Q3’s end, a total of 73 of the hedge funds tracked by Insider Monkey were long this stock, a change of 11% from the previous quarter. On the other hand, there were a total of 50 hedge funds with a bullish position in SQ a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Bares Capital Management, managed by Brian Bares, holds the number one position in Square, Inc. (NYSE:SQ). Bares Capital Management has a $925.3 million position in the stock, comprising 19.5% of its 13F portfolio. The second largest stake is held by Coatue Management, managed by Philippe Laffont, which holds a $895.2 million position; the fund has 4.7% of its 13F portfolio invested in the stock. Remaining peers that hold long positions contain Lone Pine Capital, and D. E. Shaw’s D E Shaw. In terms of the portfolio weights assigned to each position Bares Capital Management allocated the biggest weight to Square, Inc. (NYSE:SQ), around 19.53% of its 13F portfolio. ShawSpring Partners is also relatively very bullish on the stock, dishing out 18.6 percent of its 13F equity portfolio to SQ.

With a general bullishness amongst the heavyweights, key money managers have been driving this bullishness. Lone Pine Capital, founded by Stephen Mandel, initiated the largest position in Square, Inc. (NYSE:SQ). Lone Pine Capital had $872.6 million invested in the company at the end of the quarter. Andrew Immerman and Jeremy Schiffman’s Palestra Capital Management also initiated a $109.3 million position during the quarter. The other funds with new positions in the stock are Aaron Cowen’s Suvretta Capital Management, Gabriel Plotkin’s Melvin Capital Management, and Amish Mehta’s SQN Investors.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Square, Inc. (NYSE:SQ) but similarly valued. These stocks are Altria Group Inc (NYSE:MO), JD.Com Inc (NASDAQ:JD), Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX), KE Holdings Inc (NYSE:BEKE), Snowflake Inc. (NYSE:SNOW), Booking Holdings Inc. (NASDAQ:BKNG), and Crown Castle International Corp. (NYSE:CCI). This group of stocks’ market values resemble SQ’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MO 47 1259705 4
JD 85 13574479 -2
VRTX 55 3419082 1
BEKE 28 1327441 28
SNOW 59 4614302 59
BKNG 113 6675435 17
CCI 42 2127288 -1
Average 61.3 4713962 15.1

View table here if you experience formatting issues.

As you can see these stocks had an average of 61.3 hedge funds with bullish positions and the average amount invested in these stocks was $4714 million. That figure was $6502 million in SQ’s case. Booking Holdings Inc. (NASDAQ:BKNG) is the most popular stock in this table. On the other hand KE Holdings Inc (NYSE:BEKE) is the least popular one with only 28 bullish hedge fund positions. Square, Inc. (NYSE:SQ) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for SQ is 66.5. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 30.7% in 2020 through November 27th and still beat the market by 16.1 percentage points. Hedge funds were also right about betting on SQ as the stock returned 30.7% since the end of Q3 (through 11/27) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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