Hedge Funds Are Dumping FS KKR Capital Corp. (FSK)

Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors’ consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of FS KKR Capital Corp. (NASDAQ:FSK).

FS KKR Capital Corp. (NASDAQ:FSK) investors should be aware of a decrease in enthusiasm from smart money of late. FSK was in 19 hedge funds’ portfolios at the end of the first quarter of 2020. There were 28 hedge funds in our database with FSK positions at the end of the previous quarter. Our calculations also showed that FSK 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).

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 S&P 500 ETFs by more than 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 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 stocks that are in our short portfolio.

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to take a peek at the fresh hedge fund action regarding FS KKR Capital Corp. (NASDAQ:FSK).

How are hedge funds trading FS KKR Capital Corp. (NASDAQ:FSK)?

At the end of the first quarter, a total of 19 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -32% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards FSK over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in FS KKR Capital Corp. (NASDAQ:FSK) was held by Beach Point Capital Management, which reported holding $54.1 million worth of stock at the end of September. It was followed by Citadel Investment Group with a $7.6 million position. Other investors bullish on the company included Dorset Management, McKinley Capital Management, and Callodine Capital Management. In terms of the portfolio weights assigned to each position Beach Point Capital Management allocated the biggest weight to FS KKR Capital Corp. (NASDAQ:FSK), around 50.69% of its 13F portfolio. Almitas Capital is also relatively very bullish on the stock, dishing out 6.64 percent of its 13F equity portfolio to FSK.

Since FS KKR Capital Corp. (NASDAQ:FSK) has witnessed declining sentiment from the aggregate hedge fund industry, it’s safe to say that there is a sect of hedgies that elected to cut their full holdings in the first quarter. It’s worth mentioning that David Costen Haley’s HBK Investments dropped the biggest investment of the “upper crust” of funds tracked by Insider Monkey, worth an estimated $33.8 million in stock, and Eric Schneider’s OCO Capital Partners was right behind this move, as the fund said goodbye to about $18.4 million worth. These transactions are important to note, as total hedge fund interest dropped by 9 funds in the first quarter.

Let’s now review hedge fund activity in other stocks similar to FS KKR Capital Corp. (NASDAQ:FSK). We will take a look at Cantel Medical Corp. (NYSE:CMD), Guangshen Railway Co. Ltd (NYSE:GSH), Horace Mann Educators Corporation (NYSE:HMN), and Tenet Healthcare Corp (NYSE:THC). This group of stocks’ market caps are closest to FSK’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.25 hedge funds with bullish positions and the average amount invested in these stocks was $151 million. That figure was $85 million in FSK’s case. Tenet Healthcare Corp (NYSE:THC) is the most popular stock in this table. On the other hand Guangshen Railway Co. Ltd (NYSE:GSH) is the least popular one with only 2 bullish hedge fund positions. FS KKR Capital Corp. (NASDAQ:FSK) 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 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 13.4% in 2020 through June 22nd but beat the market by 15.9 percentage points. Unfortunately FSK wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on FSK were disappointed as the stock returned -70% 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 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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