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Were Hedge Funds Right About Ditching Southwest Gas Corporation (SWX)?

At Insider Monkey we track the activity of some of the best-performing hedge funds like Appaloosa Management, Baupost, and Tiger Global because we determined that some of the stocks that they are collectively bullish on can help us generate returns above the broader indices. Out of thousands of stocks that hedge funds invest in, small-caps can provide the best returns over the long term due to the fact that these companies are less efficiently priced and are usually under the radars of mass-media, analysts and dumb money. This is why we follow the smart money moves in the small-cap space.

Southwest Gas Corporation (NYSE:SWX) was in 16 hedge funds’ portfolios at the end of June. SWX investors should pay attention to a decrease in hedge fund sentiment recently. There were 20 hedge funds in our database with SWX holdings at the end of the previous quarter. Our calculations also showed that SWX isn’t among the 30 most popular stocks among hedge funds (see the video below).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to 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 market by 40 percentage points since May 2014 through May 30, 2019 (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.

GAMCO Investors, Mario Gabelli

Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn’t rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let’s take a glance at the new hedge fund action regarding Southwest Gas Corporation (NYSE:SWX).

What does smart money think about Southwest Gas Corporation (NYSE:SWX)?

Heading into the third quarter of 2019, a total of 16 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -20% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in SWX over the last 16 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

SWX_oct2019

Among these funds, Adage Capital Management held the most valuable stake in Southwest Gas Corporation (NYSE:SWX), which was worth $108.7 million at the end of the second quarter. On the second spot was GAMCO Investors which amassed $73.3 million worth of shares. Moreover, AQR Capital Management, Citadel Investment Group, and ExodusPoint Capital were also bullish on Southwest Gas Corporation (NYSE:SWX), allocating a large percentage of their portfolios to this stock.

Since Southwest Gas Corporation (NYSE:SWX) has experienced bearish sentiment from the entirety of the hedge funds we track, we can see that there were a few fund managers who were dropping their entire stakes by the end of the second quarter. Interestingly, Jonathan Barrett and Paul Segal’s Luminus Management sold off the largest position of all the hedgies monitored by Insider Monkey, comprising close to $10.8 million in stock. Peter Rathjens, Bruce Clarke and John Campbell’s fund, Arrowstreet Capital, also said goodbye to its stock, about $8.7 million worth. These moves are interesting, as total hedge fund interest fell by 4 funds by the end of the second quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Southwest Gas Corporation (NYSE:SWX). These stocks are MGIC Investment Corporation (NYSE:MTG), Cyberark Software Ltd (NASDAQ:CYBR), ONE Gas Inc (NYSE:OGS), and The Stars Group Inc. (NASDAQ:TSG). This group of stocks’ market values are similar to SWX’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MTG 35 492429 3
CYBR 19 308110 -9
OGS 14 93848 -1
TSG 38 877092 -6
Average 26.5 442870 -3.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.5 hedge funds with bullish positions and the average amount invested in these stocks was $443 million. That figure was $246 million in SWX’s case. The Stars Group Inc. (NASDAQ:TSG) is the most popular stock in this table. On the other hand ONE Gas Inc (NYSE:OGS) is the least popular one with only 14 bullish hedge fund positions. Southwest Gas Corporation (NYSE:SWX) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. A small number of hedge funds were also right about betting on SWX, though not to the same extent, as the stock returned 2.2% during the third quarter and outperformed the market.

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

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