Concerns over rising interest rates and expected further rate increases have hit several stocks hard since the end of the third quarter. NASDAQ and Russell 2000 indices are already in correction territory. More importantly, Russell 2000 ETF (IWM) underperformed the larger S&P 500 ETF (SPY) by about 4 percentage points in the first half of the fourth quarter. Hedge funds and institutional investors tracked by Insider Monkey usually invest a disproportionate amount of their portfolios in smaller cap stocks. We have been receiving indications that hedge funds were paring back their overall exposure and this is one of the factors behind the recent movements in major indices. In this article, we will take a closer look at hedge fund sentiment towards Square, Inc. (NYSE:SQ).
Square, Inc. (NYSE:SQ) has experienced a decrease in support from the world’s most elite money managers recently. SQ was in 23 hedge funds’ portfolios at the end of September. There were 29 hedge funds in our database with SQ positions at the end of the previous quarter. Our calculations also showed that SQ isn’t among the 30 most popular stocks among hedge funds.
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 market by 18 percentage points since May 2014 through December 3, 2018 (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 our short portfolio.
Let’s take a peek at the recent hedge fund action regarding Square, Inc. (NYSE:SQ).
Hedge fund activity in Square, Inc. (NYSE:SQ)
Heading into the fourth quarter of 2018, a total of 23 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -21% from one quarter earlier. By comparison, 30 hedge funds held shares or bullish call options in SQ heading into this year. With hedgies’ capital changing hands, there exists a select group of key hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).
The largest stake in Square, Inc. (NYSE:SQ) was held by D E Shaw, which reported holding $309.2 million worth of stock at the end of September. It was followed by Whale Rock Capital Management with a $230.4 million position. Other investors bullish on the company included Two Sigma Advisors, Matrix Capital Management, and Citadel Investment Group.
Since Square, Inc. (NYSE:SQ) has faced a decline in interest from the aggregate hedge fund industry, it’s easy to see that there exists a select few hedgies that decided to sell off their full holdings in the third quarter. At the top of the heap, Panayotis Takis Sparaggis’s Alkeon Capital Management sold off the biggest investment of all the hedgies watched by Insider Monkey, valued at an estimated $203.4 million in stock, and Robert Henry Lynch’s Aristeia Capital was right behind this move, as the fund cut about $168 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 6 funds in the third quarter.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Square, Inc. (NYSE:SQ) but similarly valued. These stocks are China Telecom Corporation Limited (NYSE:CHA), Delta Air Lines, Inc. (NYSE:DAL), LyondellBasell Industries NV (NYSE:LYB), and Canadian Natural Resources Limited (NYSE:CNQ). This group of stocks’ market valuations match SQ’s market valuation.
|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 33.75 hedge funds with bullish positions and the average amount invested in these stocks was $2.63 billion. That figure was $1.37 billion in SQ’s case. Delta Air Lines, Inc. (NYSE:DAL) is the most popular stock in this table. On the other hand China Telecom Corporation Limited (NYSE:CHA) is the least popular one with only 6 bullish hedge fund positions. Square, Inc. (NYSE:SQ) 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. In this regard DAL might be a better candidate to consider a long position.
Disclosure: None. This article was originally published at Insider Monkey.