Hedge Funds Are Losing Interest In Capital Southwest Corporation (CSWC)

Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The time period between June 25 and the end of October was one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 14 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually, their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of Capital Southwest Corporation (NASDAQ:CSWC).

Capital Southwest Corporation (NASDAQ:CSWC) was in 11 hedge funds’ portfolios at the end of September. Capital Southwest Corporation (NASDAQ:CSWC) investors should pay attention to a decrease in enthusiasm from smart money in recent months. There were 14 hedge funds in our database with Capital Southwest Corporation (NASDAQ:CSWC) holdings at the end of the previous quarter. At the end of this article, we will also compare Capital Southwest Corporation (NASDAQ:CSWC) to other stocks including Capital Product Partners L.P. (NASDAQ:CPLP), Sun Hydraulics Corporation (NASDAQ:SNHY), and 8×8, Inc. (NASDAQ:EGHT) to get a better sense of its popularity.

To most investors, hedge funds are assumed to be underperforming, old financial tools of the past. While there are more than 8000 funds trading today, our researchers hone in on the aristocrats of this club, approximately 700 funds. It is estimated that this group of investors directs the lion’s share of the hedge fund industry’s total asset base, and by watching their unrivaled picks, Insider Monkey has revealed various investment strategies that have historically outrun Mr. Market. Insider Monkey’s small-cap hedge fund strategy outstripped the S&P 500 index by 12 percentage points annually for a decade in their back tests.

Keeping this in mind, we’re going to go over the latest action surrounding Capital Southwest Corporation (NASDAQ:CSWC).

What have hedge funds been doing with Capital Southwest Corporation (NASDAQ:CSWC)?

Heading into Q4, a total of 11 of the hedge funds tracked by Insider Monkey held long positions in this stock, a drop of 21% from the previous quarter. With hedge funds’ capital changing hands, there exists a select group of key hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Moab Capital Partners, managed by Michael M. Rothenberg and David Sackler, holds the number one position in Capital Southwest Corporation (NASDAQ:CSWC). Moab Capital Partners has a $69.6 million position in the stock, comprising 24.5% of its 13F portfolio. Sitting at the No. 2 spot is Iszo Capital, led by Brian Sheehy, holding a $24.1 million position; 13.7% of its 13F portfolio is allocated to the company. Some other professional money managers that are bullish comprise Jonathan Savitz’s Greywolf Capital Management, Noah Levy and Eugene Dozortsev’s Newtyn Management and Martin Whitman’s Third Avenue Management.

Judging by the fact that Capital Southwest Corporation (NASDAQ: CSWC) has experienced a bearish sentiment from hedge fund managers, it’s easy to see that there were a few funds that decided to sell off their full holdings by the end of the third quarter. At the top of the heap, John A. Levin’s Levin Capital Strategies sold off the biggest position of the 700 funds watched by Insider Monkey, worth close to $0.9 million in stock, and Ken Griffin of Citadel Investment Group was right behind this move, as the fund said goodbye to about $0.4 million worth. These moves are interesting, as aggregate hedge fund interest dropped by 3 funds by the end of the third quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Capital Southwest Corporation (NASDAQ:CSWC) but similarly valued. These stocks are Capital Product Partners L.P. (NASDAQ:CPLP), Sun Hydraulics Corporation (NASDAQ:SNHY), 8×8, Inc. (NASDAQ:EGHT), and MacroGenics Inc (NASDAQ:MGNX). This group of stock market valuations is similar to Capital Southwest Corporation (NASDAQ:CSWC)’s market valuation.

As you can see, these stocks had an average of 13 hedge funds with bullish positions and the average amount invested in these stocks was $80 million. MacroGenics Inc (NASDAQ:MGNX) and Capital Product Partners L.P. (NASDAQ:CPLP) are the most and the least popular stocks, respectively. In comparison, Capital Southwest Corporation (NASDAQ:CSWC) is not the least popular stock in this group, but hedge fund interest is still below average, while the total value of holdings in the company amounted to $150 million. Capital Southwest may be a investment worth acquiring, but we prefer to look closer into stocks that hedge funds are collectively the most bullish on, such as MGNX.