Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Southwest Gas Holdings, Inc. (NYSE:SWX).
Is SWX a good stock to buy now? Southwest Gas Holdings, Inc. (NYSE:SWX) was in 16 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistic is 23. SWX shareholders have witnessed an increase in hedge fund interest of late. There were 13 hedge funds in our database with SWX positions at the end of the second quarter. 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 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.
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. With all of this in mind let’s take a gander at the recent hedge fund action regarding Southwest Gas Holdings, Inc. (NYSE:SWX).
Do Hedge Funds Think SWX Is A Good Stock To Buy Now?
At Q3’s end, a total of 16 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 23% from the previous quarter. On the other hand, there were a total of 22 hedge funds with a bullish position in SWX a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).
More specifically, GAMCO Investors was the largest shareholder of Southwest Gas Holdings, Inc. (NYSE:SWX), with a stake worth $43.3 million reported as of the end of September. Trailing GAMCO Investors was Renaissance Technologies, which amassed a stake valued at $10.6 million. AQR Capital Management, D E Shaw, and Two Sigma Advisors 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 0.48% of its 13F portfolio. Quantamental Technologies is also relatively very bullish on the stock, designating 0.21 percent of its 13F equity portfolio to SWX.
As one would reasonably expect, specific money managers have been driving this bullishness. D E Shaw, managed by D. E. Shaw, initiated the most outsized position in Southwest Gas Holdings, Inc. (NYSE:SWX). D E Shaw had $5.3 million invested in the company at the end of the quarter. Noam Gottesman’s GLG Partners also initiated a $2 million position during the quarter. The other funds with new positions in the stock are Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Michael Gelband’s ExodusPoint Capital, and Ran Pang’s Quantamental Technologies.
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Southwest Gas Holdings, Inc. (NYSE:SWX) but similarly valued. These stocks are Valvoline Inc. (NYSE:VVV), National Oilwell Varco, Inc. (NYSE:NOV), MSC Industrial Direct Co Inc (NYSE:MSM), The Hanover Insurance Group, Inc. (NYSE:THG), Texas Pacific Land Trust (NYSE:TPL), The Hain Celestial Group, Inc. (NASDAQ:HAIN), and Highwoods Properties Inc (NYSE:HIW). This group of stocks’ market caps are similar 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 25.1 hedge funds with bullish positions and the average amount invested in these stocks was $488 million. That figure was $78 million in SWX’s case. Valvoline Inc. (NYSE:VVV) is the most popular stock in this table. On the other hand Texas Pacific Land Trust (NYSE:TPL) is the least popular one with only 13 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. Our overall hedge fund sentiment score for SWX is 35.7. 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 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 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 surpassed the market again by 15.8 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 2.2% 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 most of these stocks already outperformed the market in 2020.
Follow Southwest Gas Holdings Inc. (NYSE:SWX)
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Disclosure: None. This article was originally published at Insider Monkey.