Were Hedge Funds Right About Piling Into 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). 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 first quarter and determine whether the smart money was really smart about this stock.

Square, Inc. (NYSE:SQ) shares haven’t seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 56 hedge funds’ portfolios at the end of the first quarter of 2020. At the end of this article we will also compare SQ to other stocks including T. Rowe Price Group, Inc. (NASDAQ:TROW), Verisk Analytics, Inc. (NASDAQ:VRSK), and Public Service Enterprise Group Incorporated (NYSE:PEG) to get a better sense of its popularity.

Video: Watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Eashwar Krishnan of Tybourne Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. 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 gold prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now let’s view the latest hedge fund action surrounding Square, Inc. (NYSE:SQ).

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

Heading into the second quarter of 2020, a total of 56 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards SQ over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Bares Capital Management held the most valuable stake in Square, Inc. (NYSE:SQ), which was worth $380.2 million at the end of the third quarter. On the second spot was Lone Pine Capital which amassed $350.8 million worth of shares. Citadel Investment Group, Coatue Management, and HMI 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 North Peak Capital allocated the biggest weight to Square, Inc. (NYSE:SQ), around 15.01% of its 13F portfolio. Bares Capital Management is also relatively very bullish on the stock, earmarking 13.71 percent of its 13F equity portfolio to SQ.

Due to the fact that Square, Inc. (NYSE:SQ) has experienced falling interest from the aggregate hedge fund industry, it’s safe to say that there was a specific group of funds that elected to cut their entire stakes by the end of the first quarter. Interestingly, Andreas Halvorsen’s Viking Global sold off the largest investment of the 750 funds watched by Insider Monkey, worth an estimated $628.4 million in stock, and Brian Ashford-Russell and Tim Woolley’s Polar Capital was right behind this move, as the fund dumped about $29.3 million worth. These transactions are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Square, Inc. (NYSE:SQ) but similarly valued. We will take a look at T. Rowe Price Group, Inc. (NASDAQ:TROW), Verisk Analytics, Inc. (NASDAQ:VRSK), Public Service Enterprise Group Incorporated (NYSE:PEG), and Motorola Solutions Inc (NYSE:MSI). All of these stocks’ market caps are closest to SQ’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.75 hedge funds with bullish positions and the average amount invested in these stocks was $582 million. That figure was $1609 million in SQ’s case. Public Service Enterprise Group Incorporated (NYSE:PEG) is the most popular stock in this table. On the other hand T. Rowe Price Group, Inc. (NASDAQ:TROW) is the least popular one with only 24 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on SQ as the stock returned 100.3% in Q2 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.