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Do Hedge Funds Love SolarWinds Corporation (SWI)?

Asma UL Husna

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds' and successful investors' positions as of the end of the first quarter. You can find articles about an individual hedge fund's trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of SolarWinds Corporation (NYSE:SWI) based on that data.

Is SolarWinds Corporation (NYSE:SWI) a healthy stock for your portfolio? Investors who are in the know are getting less optimistic. The number of long hedge fund positions were cut by 1 lately. Our calculations also showed that SWI 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). SWI was in 14 hedge funds' portfolios at the end of the first quarter of 2020. There were 15 hedge funds in our database with SWI positions at the end of the previous quarter. Video: Watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings 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'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.

[caption id="attachment_26088" align="aligncenter" width="392"] Chase Coleman of Tiger Global[/caption]

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, we take a look at lists like the 10 easiest car rental companies 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. Now let's view the latest hedge fund action encompassing SolarWinds Corporation (NYSE:SWI).

Hedge fund activity in SolarWinds Corporation (NYSE:SWI)

At the end of the first quarter, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of -7% from the fourth quarter of 2019. On the other hand, there were a total of 15 hedge funds with a bullish position in SWI a year ago. With hedge funds' capital changing hands, there exists a select group of key hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

Among these funds, Silver Lake Partners held the most valuable stake in SolarWinds Corporation (NYSE:SWI), which was worth $2038.9 million at the end of the third quarter. On the second spot was Sunriver Management which amassed $53.4 million worth of shares. Select Equity Group, Arrowstreet Capital, and Tiger Global Management LLC 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 60.43% of its 13F portfolio. Sunriver Management is also relatively very bullish on the stock, earmarking 9.37 percent of its 13F equity portfolio to SWI.

Judging by the fact that SolarWinds Corporation (NYSE:SWI) has witnessed falling interest from the aggregate hedge fund industry, logic holds that there was a specific group of fund managers that decided to sell off their full holdings in the first quarter. Intriguingly, Alexander Captain's Cat Rock Capital dropped the largest investment of all the hedgies monitored by Insider Monkey, totaling about $25 million in stock, and Vikas Lunia's Lunia Capital was right behind this move, as the fund dumped about $7.7 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 1 funds in the first quarter.

Let's check out hedge fund activity in other stocks similar to SolarWinds Corporation (NYSE:SWI). We will take a look at Hyatt Hotels Corporation (NYSE:H), Casey's General Stores, Inc. (NASDAQ:CASY), Acceleron Pharma Inc (NASDAQ:XLRN), and Reata Pharmaceuticals, Inc. (NASDAQ:RETA). This group of stocks' market values resemble SWI's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position H,24,513510,-3 CASY,23,158620,1 XLRN,38,775310,11 RETA,33,398437,4 Average,29.5,461469,3.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.5 hedge funds with bullish positions and the average amount invested in these stocks was $461 million. That figure was $2141 million in SWI's case. Acceleron Pharma Inc (NASDAQ:XLRN) is the most popular stock in this table. On the other hand Casey's General Stores, Inc. (NASDAQ:CASY) is the least popular one with only 23 bullish hedge fund positions. Compared to these stocks SolarWinds Corporation (NYSE:SWI) is even less popular than CASY. Hedge funds dodged a bullet by taking a bearish stance towards SWI. 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 SWI wasn't nearly as popular as these 10 stocks (hedge fund sentiment was very bearish); SWI investors were disappointed as the stock returned 17.6% 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.

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

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