Is SWCH A Good Stock To Buy Now According To Hedge Funds?

In this article we will take a look at whether hedge funds think Switch, Inc. (NYSE:SWCH) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

Is SWCH a good stock to buy now? Hedge fund interest in Switch, Inc. (NYSE:SWCH) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that SWCH 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). The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Murphy USA Inc. (NYSE:MUSA), Terreno Realty Corporation (NYSE:TRNO), and NewMarket Corporation (NYSE:NEU) to gather more data points.

Video: Watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 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.

David Siegel of Two Sigma Advisors

David Siegel of Two Sigma Advisors

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks 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. Now we’re going to go over the fresh hedge fund action surrounding Switch, Inc. (NYSE:SWCH).

Do Hedge Funds Think SWCH Is A Good Stock To Buy Now?

At Q3’s end, a total of 22 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the second quarter of 2020. By comparison, 15 hedge funds held shares or bullish call options in SWCH a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is SWCH A Good Stock To Buy?

The largest stake in Switch, Inc. (NYSE:SWCH) was held by Renaissance Technologies, which reported holding $110.7 million worth of stock at the end of September. It was followed by Rima Senvest Management with a $66.4 million position. Other investors bullish on the company included D E Shaw, Sylebra Capital Management, and Two Sigma Advisors. In terms of the portfolio weights assigned to each position Blue Grotto Capital allocated the biggest weight to Switch, Inc. (NYSE:SWCH), around 4.9% of its 13F portfolio. Rima Senvest Management is also relatively very bullish on the stock, dishing out 3.76 percent of its 13F equity portfolio to SWCH.

Due to the fact that Switch, Inc. (NYSE:SWCH) has faced bearish sentiment from the aggregate hedge fund industry, it’s easy to see that there were a few funds who were dropping their entire stakes in the third quarter. It’s worth mentioning that Minhua Zhang’s Weld Capital Management said goodbye to the largest investment of the “upper crust” of funds followed by Insider Monkey, valued at about $1 million in stock, and Benjamin A. Smith’s Laurion Capital Management was right behind this move, as the fund sold off about $1 million worth. These moves are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s also examine hedge fund activity in other stocks similar to Switch, Inc. (NYSE:SWCH). These stocks are Murphy USA Inc. (NYSE:MUSA), Terreno Realty Corporation (NYSE:TRNO), NewMarket Corporation (NYSE:NEU), Marriott Vacations Worldwide Corporation (NYSE:VAC), Physicians Realty Trust (NYSE:DOC), Ultrapar Participacoes SA (NYSE:UGP), and Shell Midstream Partners LP (NYSE:SHLX). This group of stocks’ market valuations are closest to SWCH’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MUSA 23 314514 -4
TRNO 15 38109 6
NEU 17 109363 -4
VAC 17 375694 -7
DOC 14 99026 -1
UGP 8 32826 1
SHLX 6 22934 0
Average 14.3 141781 -1.3

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.3 hedge funds with bullish positions and the average amount invested in these stocks was $142 million. That figure was $312 million in SWCH’s case. Murphy USA Inc. (NYSE:MUSA) is the most popular stock in this table. On the other hand Shell Midstream Partners LP (NYSE:SHLX) is the least popular one with only 6 bullish hedge fund positions. Switch, Inc. (NYSE:SWCH) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for SWCH is 79.6. 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. This is a slightly positive signal but 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 30.7% in 2020 through December 14th and beat the market again by 15.8 percentage points. Unfortunately SWCH wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on SWCH were disappointed as the stock returned 0.3% since the end of September (through 12/14) 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 many of these stocks already outperformed the market so far this year.

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