Like everyone else, elite investors make mistakes. Some of their top consensus picks, such as Amazon, Facebook and Alibaba, have not done well in Q4 due to various reasons. Nevertheless, the data show elite investors' consensus picks have done well on average over the long-term. The top 20 stocks among hedge funds beat the S&P 500 Index ETF by more than 6 percentage points so far this year. Because their consensus picks have done well, we pay attention to what elite funds think before doing extensive research on a stock. In this article, we take a closer look at SolarWinds Corporation (NYSE:SWI) from the perspective of those elite funds.
SolarWinds Corporation (NYSE:SWI) shares haven't seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 15 hedge funds' portfolios at the end of March. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Bruker Corporation (NASDAQ:BRKR), Texas Pacific Land Trust (NYSE:TPL), and CubeSmart (NYSE:CUBE) to gather more data points.
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 market by 40 percentage points since May 2014 through May 30, 2019 (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 our short portfolio.
[caption id="attachment_745225" align="aligncenter" width="473"] Noam Gottesman, GLG Partners[/caption]
Let's go over the fresh hedge fund action surrounding SolarWinds Corporation (NYSE:SWI).
What does smart money think about SolarWinds Corporation (NYSE:SWI)?
Heading into the second quarter of 2019, a total of 15 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the fourth quarter of 2018. The graph below displays the number of hedge funds with bullish position in SWI over the last 15 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Jim Davidson,áDave RouxáandáGlenn Hutchins's Silver Lake Partners has the largest position in SolarWinds Corporation (NYSE:SWI), worth close to $2.6872 billion, comprising 61.4% of its total 13F portfolio. The second most bullish fund manager is Sunriver Management, led by Will Cook, holding a $21.1 million position; 4.2% of its 13F portfolio is allocated to the company. Some other peers that hold long positions include Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, Anand Parekh's Alyeska Investment Group and Israel Englander's Millennium Management.
Because SolarWinds Corporation (NYSE:SWI) has experienced a decline in interest from the aggregate hedge fund industry, logic holds that there were a few hedgies that slashed their full holdings in the third quarter. Interestingly, Gil Simon's SoMa Equity Partners cut the biggest stake of the 700 funds monitored by Insider Monkey, worth close to $9 million in stock, and Andrew Feldstein and Stephen Siderow's Blue Mountain Capital was right behind this move, as the fund cut about $3.7 million worth. These transactions are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's check out hedge fund activity in other stocks similar to SolarWinds Corporation (NYSE:SWI). We will take a look at Bruker Corporation (NASDAQ:BRKR), Texas Pacific Land Trust (NYSE:TPL), CubeSmart (NYSE:CUBE), and Royal Gold, Inc (NASDAQ:RGLD). This group of stocks' market values match SWI's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BRKR,25,400030,-1 TPL,11,1470997,-2 CUBE,20,393248,-2 RGLD,17,67145,2 Average,18.25,582855,-0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.25 hedge funds with bullish positions and the average amount invested in these stocks was $583 million. That figure was $2759 million in SWI's case. Bruker Corporation (NASDAQ:BRKR) is the most popular stock in this table. On the other hand Texas Pacific Land Trust (NYSE:TPL) is the least popular one with only 11 bullish hedge fund positions. SolarWinds Corporation (NYSE:SWI) is not the least popular stock in this group but hedge fund interest is still below average. 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 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately SWI wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); SWI investors were disappointed as the stock returned -5.6% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.