Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards SolarWinds Corporation (NYSE:SWI).
SolarWinds Corporation (NYSE:SWI) shareholders have witnessed a decrease in hedge fund sentiment of late. SolarWinds Corporation (NYSE:SWI) was in 22 hedge funds' portfolios at the end of the first quarter of 2021. The all time high for this statistic is 24. Our calculations also showed that SWI isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings).
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 206.8% since March 2017 and outperformed the S&P 500 ETFs by more than 115 percentage points (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Michael Price of MFP Investors
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, Chuck Schumer recently stated that marijuana legalization will be a Senate priority. So, we are checking out this under the radar stock that will benefit from this. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. Keeping this in mind we're going to go over the recent hedge fund action regarding SolarWinds Corporation (NYSE:SWI).
Do Hedge Funds Think SWI Is A Good Stock To Buy Now?
At Q1's end, a total of 22 of the hedge funds tracked by Insider Monkey were long this stock, a change of -8% from the fourth quarter of 2020. On the other hand, there were a total of 14 hedge funds with a bullish position 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.
Among these funds, Silver Lake Partners held the most valuable stake in SolarWinds Corporation (NYSE:SWI), which was worth $2144.2 million at the end of the fourth quarter. On the second spot was Southpoint Capital Advisors which amassed $61 million worth of shares. AQR Capital Management, First Pacific Advisors LLC, and Islet 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 Silver Lake Partners allocated the biggest weight to SolarWinds Corporation (NYSE:SWI), around 21.37% of its 13F portfolio. Southpoint Capital Advisors is also relatively very bullish on the stock, dishing out 1.01 percent of its 13F equity portfolio to SWI.
Due to the fact that SolarWinds Corporation (NYSE:SWI) has faced a decline in interest from the smart money, logic holds that there lies a certain "tier" of funds who were dropping their full holdings in the first quarter. Interestingly, Will Cook's Sunriver Management said goodbye to the biggest stake of the "upper crust" of funds watched by Insider Monkey, worth about $22 million in stock. Michael Gelband's fund, ExodusPoint Capital, also sold off its stock, about $1.1 million worth. These transactions are important to note, as aggregate hedge fund interest fell by 2 funds in the first quarter.
Let's now review hedge fund activity in other stocks similar to SolarWinds Corporation (NYSE:SWI). We will take a look at Crane Co. (NYSE:CR), MAXIMUS, Inc. (NYSE:MMS), Braskem SA (NYSE:BAK), Glacier Bancorp, Inc. (NASDAQ:GBCI), Enstar Group Ltd. (NASDAQ:ESGR), Nikola Corporation (NASDAQ:NKLA), and Intellia Therapeutics, Inc. (NASDAQ:NTLA). This group of stocks' market values are similar to SWI's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CR,17,277149,-7 MMS,18,116208,-6 BAK,8,29378,0 GBCI,16,66851,5 ESGR,11,504821,0 NKLA,19,337442,1 NTLA,29,1139388,-1 Average,16.9,353034,-1.1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.9 hedge funds with bullish positions and the average amount invested in these stocks was $353 million. That figure was $2291 million in SWI's case. Intellia Therapeutics, Inc. (NASDAQ:NTLA) is the most popular stock in this table. On the other hand Braskem SA (NYSE:BAK) is the least popular one with only 8 bullish hedge fund positions. SolarWinds Corporation (NYSE:SWI) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for SWI is 63.8. 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 positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 23.8% in 2021 through July 16th and beat the market again by 7.7 percentage points. Unfortunately SWI wasn't nearly as popular as these 5 stocks and hedge funds that were betting on SWI were disappointed as the stock returned -2.8% since the end of March (through 7/16) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.
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Disclosure: None. This article was originally published at Insider Monkey.