Hedge Funds Cautiously Watching Bain Capital Specialty Finance, Inc. (BCSF)

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. Insider Monkey finished processing 821 13F filings submitted by hedge funds and prominent investors. These filings show these funds’ portfolio positions as of March 31st, 2020. In this article we are going to take a look at smart money sentiment towards Bain Capital Specialty Finance, Inc. (NYSE:BCSF).

Bain Capital Specialty Finance, Inc. (NYSE:BCSF) shares haven’t seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 8 hedge funds’ portfolios at the end of the first quarter of 2020. 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 Hawaiian Holdings, Inc. (NASDAQ:HA), Univest Financial Corporation (NASDAQ:UVSP), and iHeartMedia, Inc. (NASDAQ:IHRT) to gather more data points. Our calculations also showed that BCSF 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.

John Overdeck of Two Sigma Advisors

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, We take a look at lists like the 10 most profitable companies in the world to identify the compounders that are likely to deliver double digit returns. 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. Keeping this in mind let’s analyze the recent hedge fund action encompassing Bain Capital Specialty Finance, Inc. (NYSE:BCSF).

How have hedgies been trading Bain Capital Specialty Finance, Inc. (NYSE:BCSF)?

At the end of the first quarter, a total of 8 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. On the other hand, there were a total of 2 hedge funds with a bullish position in BCSF a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

Among these funds, Arrowstreet Capital held the most valuable stake in Bain Capital Specialty Finance, Inc. (NYSE:BCSF), which was worth $6.1 million at the end of the third quarter. On the second spot was Two Sigma Advisors which amassed $3.7 million worth of shares. D E Shaw, Millennium Management, and Citadel Investment Group 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 Arrowstreet Capital allocated the biggest weight to Bain Capital Specialty Finance, Inc. (NYSE:BCSF), around 0.02% of its 13F portfolio. Two Sigma Advisors is also relatively very bullish on the stock, dishing out 0.01 percent of its 13F equity portfolio to BCSF.

Due to the fact that Bain Capital Specialty Finance, Inc. (NYSE:BCSF) has witnessed declining sentiment from the entirety of the hedge funds we track, logic holds that there lies a certain “tier” of hedgies that slashed their entire stakes in the first quarter. At the top of the heap, Derek C. Schrier’s Indaba Capital Management sold off the largest stake of the 750 funds followed by Insider Monkey, worth close to $8.4 million in stock. Daniel Johnson’s fund, Gillson Capital, also dumped its stock, about $1.9 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s go over hedge fund activity in other stocks similar to Bain Capital Specialty Finance, Inc. (NYSE:BCSF). These stocks are Hawaiian Holdings, Inc. (NASDAQ:HA), Univest Financial Corporation (NASDAQ:UVSP), iHeartMedia, Inc. (NASDAQ:IHRT), and SP Plus Corp (NASDAQ:SP). All of these stocks’ market caps match BCSF’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.25 hedge funds with bullish positions and the average amount invested in these stocks was $68 million. That figure was $13 million in BCSF’s case. iHeartMedia, Inc. (NASDAQ:IHRT) is the most popular stock in this table. On the other hand Univest Financial Corporation (NASDAQ:UVSP) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Bain Capital Specialty Finance, Inc. (NYSE:BCSF) is even less popular than UVSP. Hedge funds clearly dropped the ball on BCSF as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 12.2% in 2020 through June 17th and still beat the market by 14.8 percentage points. A small number of hedge funds were also right about betting on BCSF as the stock returned 33.6% so far in the second quarter and outperformed the market by an even larger margin.

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