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Were Hedge Funds Right About Flocking Into Square, Inc. (SQ) ?

Nina Todic

Hedge funds are not perfect. They have their bad picks just like everyone else. Facebook, a stock hedge funds have loved, lost nearly 40% of its value at one point in 2018. Although hedge funds are not perfect, their consensus picks do deliver solid returns, however. Our data show the top 15 S&P 500 stocks among hedge funds at the end of December 2018 yielded an average return of 19.7% year-to-date, vs. a gain of 13.1% for the S&P 500 Index. Because hedge funds have a lot of resources and their consensus picks do well, we pay attention to what they think. In this article, we analyze what the elite funds think of Square, Inc. (NYSE:SQ).

Is Square, Inc. (NYSE:SQ) a buy here? The smart money is in a bullish mood. The number of bullish hedge fund positions inched up by 12 lately. Our calculations also showed that SQ isn't among the 30 most popular stocks among hedge funds. SQ was in 35 hedge funds' portfolios at the end of December. There were 23 hedge funds in our database with SQ holdings at the end of the previous quarter.

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 flagship best performing hedge funds strategy returned 20.7% year to date (through March 12th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 32 percentage points since its inception (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

D. E. Shaw

Let's take a peek at the latest hedge fund action surrounding Square, Inc. (NYSE:SQ).

Hedge fund activity in Square, Inc. (NYSE:SQ)

At Q4's end, a total of 35 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 52% from the second quarter of 2018. On the other hand, there were a total of 31 hedge funds with a bullish position in SQ a year ago. With hedgies' capital changing hands, there exists an "upper tier" of noteworthy hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).

SQ

The largest stake in Square, Inc. (NYSE:SQ) was held by D E Shaw, which reported holding $125.1 million worth of stock at the end of September. It was followed by Matrix Capital Management with a $117.8 million position. Other investors bullish on the company included Citadel Investment Group, Whale Rock Capital Management, and Renaissance Technologies.

As industrywide interest jumped, key hedge funds were leading the bulls' herd. Alkeon Capital Management, managed by Panayotis Takis Sparaggis, created the largest call position in Square, Inc. (NYSE:SQ). Alkeon Capital Management had $55.9 million invested in the company at the end of the quarter. Alex Sacerdote's Whale Rock Capital Management also made a $50.5 million investment in the stock during the quarter. The following funds were also among the new SQ investors: Matthew Hulsizer's PEAK6 Capital Management, Steve Cohen's Point72 Asset Management, and Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital.

Let's now review hedge fund activity in other stocks similar to Square, Inc. (NYSE:SQ). These stocks are Wipro Limited (NYSE:WIT), IQVIA Holdings, Inc. (NYSE:IQV), Archer Daniels Midland Company (NYSE:ADM), and Hormel Foods Corporation (NYSE:HRL). All of these stocks' market caps are similar to SQ's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WIT,10,78086,2 IQV,49,4512859,1 ADM,29,605103,-3 HRL,18,125830,6 Average,26.5,1330470,1.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.5 hedge funds with bullish positions and the average amount invested in these stocks was $1330 million. That figure was $841 million in SQ's case. IQVIA Holdings, Inc. (NYSE:IQV) is the most popular stock in this table. On the other hand Wipro Limited (NYSE:WIT) is the least popular one with only 10 bullish hedge fund positions. Square, Inc. (NYSE:SQ) is not the most popular stock in this group but hedge fund interest is still above average. 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 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Hedge funds were also right about betting on Square as the stock returned 36.7% and outperformed the market as well.

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

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