Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (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. How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding SolarWinds Corporation (NYSE:SWI).
Is SolarWinds Corporation (NYSE:SWI) a safe investment now? Investors who are in the know are betting on the stock. The number of long hedge fund positions inched up by 2 lately. Our calculations also showed that SWI 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). SWI was in 15 hedge funds’ portfolios at the end of December. There were 13 hedge funds in our database with SWI positions at the end of the previous quarter.
Today there are a large number of tools stock market investors have at their disposal to analyze their stock investments. A couple of the best tools are hedge fund and insider trading signals. Our researchers have shown that, historically, those who follow the best picks of the top investment managers can outperform their index-focused peers by a solid margin (see the details here).
Philippe Laffont of Coatue Management
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. 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. Now we’re going to go over the key hedge fund action surrounding SolarWinds Corporation (NYSE:SWI).
How have hedgies been trading SolarWinds Corporation (NYSE:SWI)?
At the end of the fourth quarter, a total of 15 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 15% from the third quarter of 2019. By comparison, 15 hedge funds held shares or bullish call options in SWI a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Silver Lake Partners was the largest shareholder of SolarWinds Corporation (NYSE:SWI), with a stake worth $2413.7 million reported as of the end of September. Trailing Silver Lake Partners was Sunriver Management, which amassed a stake valued at $47.5 million. Cat Rock Capital, Arrowstreet Capital, and Lunia Capital 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 Silver Lake Partners allocated the biggest weight to SolarWinds Corporation (NYSE:SWI), around 58.39% of its 13F portfolio. Sunriver Management is also relatively very bullish on the stock, setting aside 8.34 percent of its 13F equity portfolio to SWI.
As aggregate interest increased, key money managers were breaking ground themselves. Islet Management, managed by Joseph Samuels, assembled the biggest position in SolarWinds Corporation (NYSE:SWI). Islet Management had $4.2 million invested in the company at the end of the quarter. Donald Sussman’s Paloma Partners also made a $0.8 million investment in the stock during the quarter. The other funds with brand new SWI positions are Philippe Laffont’s Coatue Management and Steve Cohen’s Point72 Asset Management.
Let’s also examine hedge fund activity in other stocks similar to SolarWinds Corporation (NYSE:SWI). These stocks are Choice Hotels International, Inc. (NYSE:CHH), Allison Transmission Holdings Inc (NYSE:ALSN), PG&E Corporation (NYSE:PCG), and Synovus Financial Corp. (NYSE:SNV). This group of stocks’ market values are closest to SWI’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CHH | 16 | 124873 | -6 |
| ALSN | 33 | 769433 | 2 |
| PCG | 50 | 2755115 | -16 |
| SNV | 35 | 691562 | -4 |
| Average | 33.5 | 1085246 | -6 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 33.5 hedge funds with bullish positions and the average amount invested in these stocks was $1085 million. That figure was $2527 million in SWI’s case. PG&E Corporation (NYSE:PCG) is the most popular stock in this table. On the other hand Choice Hotels International, Inc. (NYSE:CHH) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks SolarWinds Corporation (NYSE:SWI) is even less popular than CHH. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but managed to beat the market by 5.5 percentage points. A small number of hedge funds were also right about betting on SWI, though not to the same extent, as the stock returned -19.9% during the same time period and outperformed the market as well.
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.
