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

Will the new coronavirus cause a recession in US in the next 6 months? On February 27th, we put the probability at 75% 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 splendid investment right now? Money managers are getting more bullish. The number of long hedge fund positions rose by 6 lately. Our calculations also showed that SQ isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). SQ was in 56 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 50 hedge funds in our database with SQ holdings at the end of the previous quarter.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 72.9% since March 2017 and outperformed the S&P 500 ETFs by more than 41 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Andreas Halvorsen

Andreas Halvorsen of Viking Global

We leave no stone unturned when looking for the next great investment idea. For example, this trader is claiming triple digit returns, so we check out his latest trade recommendations. Federal Reserve and Central Banks all around world are printing money like there is no tomorrow, so we check out this this precious metals expert’s stock pick. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences (by the way watch this video if you want to hear one of the best healthcare hedge fund manager’s coronavirus analysis). Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to take a look at the new hedge fund action encompassing Square, Inc. (NYSE:SQ).

How have hedgies been trading Square, Inc. (NYSE:SQ)?

Heading into the first quarter of 2020, a total of 56 of the hedge funds tracked by Insider Monkey were long this stock, a change of 12% from one quarter earlier. By comparison, 35 hedge funds held shares or bullish call options in SQ a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

Is SQ A Good Stock To Buy?

The largest stake in Square, Inc. (NYSE:SQ) was held by Viking Global, which reported holding $628.4 million worth of stock at the end of September. It was followed by Lone Pine Capital with a $550.4 million position. Other investors bullish on the company included Bares Capital Management, Coatue Management, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Clearfield Capital allocated the biggest weight to Square, Inc. (NYSE:SQ), around 12.37% of its 13F portfolio. Bares Capital Management is also relatively very bullish on the stock, earmarking 9.1 percent of its 13F equity portfolio to SQ.

As industrywide interest jumped, some big names have been driving this bullishness. HMI Capital, managed by Mick Hellman, created the most valuable position in Square, Inc. (NYSE:SQ). HMI Capital had $85.6 million invested in the company at the end of the quarter. Philip Hilal’s Clearfield Capital also initiated a $28 million position during the quarter. The other funds with new positions in the stock are Renaissance Technologies, Gavin Baker’s Atreides Management, and John Overdeck and David Siegel’s Two Sigma Advisors.

Let’s also examine hedge fund activity in other stocks similar to Square, Inc. (NYSE:SQ). We will take a look at TD Ameritrade Holding Corp. (NYSE:AMTD), Sun Life Financial Inc. (NYSE:SLF), Discover Financial Services (NYSE:DFS), and Agilent Technologies Inc. (NYSE:A). All of these stocks’ market caps are closest to SQ’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AMTD 50 1411932 19
SLF 16 132762 3
DFS 39 830938 -2
A 46 2470187 5
Average 37.75 1211455 6.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 37.75 hedge funds with bullish positions and the average amount invested in these stocks was $1211 million. That figure was $2387 million in SQ’s case. TD Ameritrade Holding Corp. (NYSE:AMTD) is the most popular stock in this table. On the other hand Sun Life Financial Inc. (NYSE:SLF) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks Square, Inc. (NYSE:SQ) is more popular among hedge funds. 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 lost 1.0% in 2020 through April 20th but still managed to beat the market by 11 percentage points. Hedge funds were also right about betting on SQ, though not to the same extent, as the stock returned -2.4% in 2020 (through April 20th) and outperformed the market as well.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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