Were Hedge Funds Right About Piling Into Switch, Inc. (SWCH)?

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 (see why hell is coming). 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 Switch, Inc. (NYSE:SWCH) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Is Switch, Inc. (NYSE:SWCH) a healthy stock for your portfolio? The best stock pickers were betting on the stock. The number of long hedge fund bets went up by 6 recently. Our calculations also showed that SWCH isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 58 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Bruce Kovner, Caxton Associates LP

Bruce Kovner of Caxton Associates LP

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. Now we’re going to view the key hedge fund action regarding Switch, Inc. (NYSE:SWCH).

Hedge fund activity in Switch, Inc. (NYSE:SWCH)

Heading into the second quarter of 2020, a total of 24 of the hedge funds tracked by Insider Monkey were long this stock, a change of 33% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards SWCH over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

Is SWCH A Good Stock To Buy?

According to Insider Monkey’s hedge fund database, Daniel Patrick Gibson’s Sylebra Capital Management has the largest position in Switch, Inc. (NYSE:SWCH), worth close to $132.4 million, amounting to 5.4% of its total 13F portfolio. On Sylebra Capital Management’s heels is Renaissance Technologies, with a $107.5 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Other hedge funds and institutional investors that are bullish consist of Richard Mashaal’s Rima Senvest Management, Greg Poole’s Echo Street Capital Management and Mark Coe’s Intrinsic Edge Capital. In terms of the portfolio weights assigned to each position Blue Grotto Capital allocated the biggest weight to Switch, Inc. (NYSE:SWCH), around 6.61% of its 13F portfolio. Rima Senvest Management is also relatively very bullish on the stock, setting aside 5.69 percent of its 13F equity portfolio to SWCH.

As aggregate interest increased, key hedge funds were breaking ground themselves. Echo Street Capital Management, managed by Greg Poole, initiated the most valuable position in Switch, Inc. (NYSE:SWCH). Echo Street Capital Management had $27.7 million invested in the company at the end of the quarter. Mark Coe’s Intrinsic Edge Capital also made a $16.8 million investment in the stock during the quarter. The other funds with brand new SWCH positions are Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Bruce Kovner’s Caxton Associates LP, and Greg Eisner’s Engineers Gate Manager.

Let’s now take a look at hedge fund activity in other stocks similar to Switch, Inc. (NYSE:SWCH). We will take a look at TCF Financial Corporation (NYSE:TCF), Emcor Group Inc (NYSE:EME), Ormat Technologies, Inc. (NYSE:ORA), and Schneider National, Inc. (NYSE:SNDR). All of these stocks’ market caps resemble SWCH’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TCF 19 100615 -5
EME 24 201184 -5
ORA 9 164907 -7
SNDR 22 66577 0
Average 18.5 133321 -4.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.5 hedge funds with bullish positions and the average amount invested in these stocks was $133 million. That figure was $394 million in SWCH’s case. Emcor Group Inc (NYSE:EME) is the most popular stock in this table. On the other hand Ormat Technologies, Inc. (NYSE:ORA) is the least popular one with only 9 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 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 gained 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on SWCH, though not to the same extent, as the stock returned 23.7% during the second quarter and outperformed the market as well.

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