Were Hedge Funds Right About Selling Southwest Gas Holdings, Inc. (SWX)?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtSouthwest Gas Holdings, Inc. (NYSE:SWX) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Southwest Gas Holdings, Inc. (NYSE:SWX) was in 13 hedge funds’ portfolios at the end of the first quarter of 2020. SWX shareholders have witnessed a decrease in activity from the world’s largest hedge funds recently. There were 23 hedge funds in our database with SWX holdings at the end of the previous quarter. Our calculations also showed that SWX 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.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, we take a look at lists like the 12 largest cement producing countries to identify emerging trends that are likely to lead to 1000% gains in the coming years. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. 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. Keeping this in mind we’re going to review the fresh hedge fund action encompassing Southwest Gas Holdings, Inc. (NYSE:SWX).

What does smart money think about Southwest Gas Holdings, Inc. (NYSE:SWX)?

At the end of the first quarter, a total of 13 of the hedge funds tracked by Insider Monkey were long this stock, a change of -43% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in SWX over the last 18 quarters. With hedge funds’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

Among these funds, GAMCO Investors held the most valuable stake in Southwest Gas Holdings, Inc. (NYSE:SWX), which was worth $50.3 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $11.4 million worth of shares. Citadel Investment Group, Two Sigma Advisors, 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 GAMCO Investors allocated the biggest weight to Southwest Gas Holdings, Inc. (NYSE:SWX), around 0.59% of its 13F portfolio. Algert Coldiron Investors is also relatively very bullish on the stock, setting aside 0.47 percent of its 13F equity portfolio to SWX.

Since Southwest Gas Holdings, Inc. (NYSE:SWX) has faced declining sentiment from the aggregate hedge fund industry, logic holds that there is a sect of funds that slashed their entire stakes by the end of the first quarter. It’s worth mentioning that Phill Gross and Robert Atchinson’s Adage Capital Management sold off the biggest position of the 750 funds followed by Insider Monkey, comprising an estimated $68.9 million in stock. Peter J. Hark’s fund, Shelter Harbor Advisors, also cut its stock, about $5.7 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 10 funds by the end of the first quarter.

Let’s go over hedge fund activity in other stocks similar to Southwest Gas Holdings, Inc. (NYSE:SWX). These stocks are American Campus Communities, Inc. (NYSE:ACC), Sealed Air Corporation (NYSE:SEE), KT Corporation (NYSE:KT), and Armstrong World Industries, Inc. (NYSE:AWI). All of these stocks’ market caps match SWX’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $345 million. That figure was $80 million in SWX’s case. Sealed Air Corporation (NYSE:SEE) is the most popular stock in this table. On the other hand KT Corporation (NYSE:KT) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks Southwest Gas Holdings, Inc. (NYSE:SWX) is even less popular than KT. Hedge funds dodged a bullet by taking a bearish stance towards SWX. Our calculations showed that the top 10 most popular hedge fund stocks returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 13.3% in 2020 through June 25th but managed to beat the market by 16.8 percentage points. Unfortunately SWX wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); SWX investors were disappointed as the stock returned -5.2% during the second quarter (through June 25th) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.

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