Hedge Funds Can’t Buy Enough Of 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 (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. 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) at the end of the second quarter and determine whether the smart money was really smart about this stock.

Is Square, Inc. (NYSE:SQ) an excellent stock to buy now? Money managers were becoming hopeful. The number of long hedge fund bets advanced by 10 in recent months. 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).

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 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 S&P 500 ETFs by 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 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.

Philippe Laffont of Coatue Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock.. We go through lists like the 10 most profitable companies in America 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Now we’re going to take a gander at the key hedge fund action regarding Square, Inc. (NYSE:SQ).

What have hedge funds been doing with Square, Inc. (NYSE:SQ)?

At the end of the second quarter, a total of 66 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 18% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in SQ over the last 20 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

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.

With a general bullishness amongst the heavyweights, key hedge funds have been driving this bullishness. Whale Rock Capital Management, managed by Alex Sacerdote, initiated the most valuable 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 initiated a $85.5 million position during the quarter. The following funds were also among the new SQ investors: Dan Loeb’s Third Point, Israel Englander’s Millennium Management, and Joel Ramin’s 12 West Capital Management.

Let’s also examine hedge fund activity in other stocks similar to Square, Inc. (NYSE:SQ). These stocks are 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 The PNC Financial Services Group Inc. (NYSE:PNC). This group of stocks’ market valuations resemble SQ’s market valuation.

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. The 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 28.2% in 2020 through August 24th but still managed to beat the market by 20.6 percentage points. Hedge funds were also right about betting on SQ as the stock returned 44.6% since the end of June 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.

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