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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 Switch, Inc. (NYSE:SWCH) at the end of the second quarter and determine whether the smart money was really smart about this stock.
Switch, Inc. (NYSE:SWCH) has experienced a decrease in hedge fund interest in recent months. Switch, Inc. (NYSE:SWCH) was in 22 hedge funds' portfolios at the end of June. The all time high for this statistics is 24. There were 24 hedge funds in our database with SWCH positions at the end of the first quarter. Our calculations also showed that SWCH 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.
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 101% since March 2017 and outperformed the S&P 500 ETFs by more than 56 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.
David Siegel of Two Sigma Advisors
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, 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 lithium company which could also benefit from the electric car adoption. We go through lists like the 10 most profitable companies in the world 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. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. With all of this in mind let's view the latest hedge fund action surrounding Switch, Inc. (NYSE:SWCH).
What does smart money think about Switch, Inc. (NYSE:SWCH)?
Heading into the third quarter of 2020, a total of 22 of the hedge funds tracked by Insider Monkey were long this stock, a change of -8% from one quarter earlier. On the other hand, there were a total of 13 hedge funds with a bullish position in SWCH a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).
More specifically, Renaissance Technologies was the largest shareholder of Switch, Inc. (NYSE:SWCH), with a stake worth $129.9 million reported as of the end of September. Trailing Renaissance Technologies was Sylebra Capital Management, which amassed a stake valued at $111.5 million. Rima Senvest Management, Two Sigma Advisors, and Millennium Management 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 Blue Grotto Capital allocated the biggest weight to Switch, Inc. (NYSE:SWCH), around 5.7% of its 13F portfolio. Sylebra Capital Management is also relatively very bullish on the stock, setting aside 3.47 percent of its 13F equity portfolio to SWCH.
Seeing as Switch, Inc. (NYSE:SWCH) has faced declining sentiment from hedge fund managers, logic holds that there was a specific group of fund managers that elected to cut their entire stakes last quarter. At the top of the heap, Mark Coe's Intrinsic Edge Capital dumped the largest stake of the "upper crust" of funds tracked by Insider Monkey, totaling close to $16.8 million in stock, and Dmitry Balyasny's Balyasny Asset Management was right behind this move, as the fund dropped about $2 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest was cut by 2 funds last quarter.
Let's now review hedge fund activity in other stocks similar to Switch, Inc. (NYSE:SWCH). These stocks are Grand Canyon Education Inc (NASDAQ:LOPE), Biohaven Pharmaceutical Holding Company Ltd. (NYSE:BHVN), Tetra Tech, Inc. (NASDAQ:TTEK), Lancaster Colony Corporation (NASDAQ:LANC), Inovio Pharmaceuticals Inc (NYSE:INO), FTI Consulting, Inc. (NYSE:FCN), and Tata Motors Limited (NYSE:TTM). This group of stocks' market values are closest to SWCH's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LOPE,35,206855,7 BHVN,42,915722,13 TTEK,19,90700,-2 LANC,19,246200,-4 INO,14,117679,6 FCN,32,377924,13 TTM,9,36380,-1 Average,24.3,284494,4.6 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 24.3 hedge funds with bullish positions and the average amount invested in these stocks was $284 million. That figure was $410 million in SWCH's case. Biohaven Pharmaceutical Holding Company Ltd. (NYSE:BHVN) is the most popular stock in this table. On the other hand Tata Motors Limited (NYSE:TTM) is the least popular one with only 9 bullish hedge fund positions. Switch, Inc. (NYSE:SWCH) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for SWCH is 50.2. 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. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. 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 gained 24.8% in 2020 through the end of September and surpassed the market by 19.3 percentage points. Unfortunately SWCH wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); SWCH investors were disappointed as the stock returned -12.1% in the third quarter 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 in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.