Were Hedge Funds Right About Crowding Into Square, Inc. (SQ)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (Recession is Imminent: We Need A Travel Ban NOW). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Square, Inc. (NYSE:SQ).

Is Square, Inc. (NYSE:SQ) a buy, sell, or hold? The best stock pickers were betting on the stock. The number of bullish hedge fund bets improved by 10 lately. Square, Inc. (NYSE:SQ) was in 66 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 56. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that SQ isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 56 hedge funds in our database with SQ holdings at the end of March.

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

If you’d ask most traders, hedge funds are assumed to be worthless, outdated financial tools of the past. While there are greater than 8000 funds in operation at the moment, Our researchers choose to focus on the aristocrats of this group, approximately 850 funds. It is estimated that this group of investors control the majority of the smart money’s total capital, and by keeping track of their best investments, Insider Monkey has figured out various investment strategies that have historically outstripped the broader indices. Insider Monkey’s flagship short hedge fund strategy defeated the S&P 500 short ETFs by around 20 percentage points per year since its inception in March 2017. Our portfolio of short stocks lost 34% since February 2017 (through August 17th) even though the market was up 53% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

THIRD POINT

Dan Loeb of Third Point

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world 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 to get excerpts of these letters in your inbox. With all of this in mind let’s take a gander at the new hedge fund action surrounding Square, Inc. (NYSE:SQ).

What does smart money think about Square, Inc. (NYSE:SQ)?

At second quarter’s end, a total of 66 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 18% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in SQ over the last 20 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Bares Capital Management held the most valuable stake in Square, Inc. (NYSE:SQ), which was worth $655.5 million at the end of the third quarter. On the second spot was Coatue Management which amassed $454 million worth of shares. Whale Rock Capital Management, Citadel Investment Group, and D E Shaw 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 ShawSpring Partners allocated the biggest weight to Square, Inc. (NYSE:SQ), around 19.16% of its 13F portfolio. Bares Capital Management is also relatively very bullish on the stock, dishing out 16.18 percent of its 13F equity portfolio to SQ.

Now, key hedge funds were leading the bulls’ herd. Whale Rock Capital Management, managed by Alex Sacerdote, created the biggest position in Square, Inc. (NYSE:SQ). Whale Rock Capital Management had $362.4 million invested in the company at the end of the quarter. Dennis Hong’s ShawSpring Partners also made a $85.5 million investment in the stock during the quarter. The other funds with new positions in the stock are Dan Loeb’s Third Point, Israel Englander’s Millennium Management, and Joel Ramin’s 12 West Capital Management.

Let’s check out hedge fund activity in other stocks similar to Square, Inc. (NYSE:SQ). We will take a look at Relx PLC (NYSE:RELX), Analog Devices, Inc. (NASDAQ:ADI), Westpac Banking Corporation (NYSE:WBK), ConocoPhillips (NYSE:COP), Norfolk Southern Corp. (NYSE:NSC), Waste Management, Inc. (NYSE:WM), and PNC Financial Services Group Inc. (NYSE:PNC). All of these stocks’ market caps resemble SQ’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
RELX 6 118963 1
ADI 49 2849471 4
WBK 4 28400 -5
COP 44 912521 -10
NSC 47 867199 -4
WM 39 2844869 -1
PNC 52 1108094 12
Average 34.4 1247074 -0.4

View table here if you experience formatting issues.

As you can see these stocks had an average of 34.4 hedge funds with bullish positions and the average amount invested in these stocks was $1247 million. That figure was $3487 million in SQ’s case. PNC Financial Services Group Inc. (NYSE:PNC) is the most popular stock in this table. On the other hand Westpac Banking Corporation (NYSE:WBK) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Square, Inc. (NYSE:SQ) is more popular among hedge funds. Our overall hedge fund sentiment score for SQ is 90. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks returned 29.2% in 2020 through October 16th but still managed to beat the market by 19.7 percentage points. Hedge funds were also right about betting on SQ as the stock returned 77.6% since the end of June (through 10/16) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

Follow Square Inc. (NYSE:SQ)

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