How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Monroe Capital Corp (NASDAQ:MRCC).
Monroe Capital Corp (NASDAQ:MRCC) has seen an increase in hedge fund interest recently. MRCC was in 6 hedge funds’ portfolios at the end of September. There were 4 hedge funds in our database with MRCC holdings at the end of the previous quarter. Our calculations also showed that MRCC isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
David E. Shaw of D.E. Shaw
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. With all of this in mind we’re going to go over the key hedge fund action regarding Monroe Capital Corp (NASDAQ:MRCC).
Hedge fund activity in Monroe Capital Corp (NASDAQ:MRCC)
At Q3’s end, a total of 6 of the hedge funds tracked by Insider Monkey were long this stock, a change of 50% from the previous quarter. The graph below displays the number of hedge funds with bullish position in MRCC over the last 17 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).
Among these funds, McKinley Capital Management held the most valuable stake in Monroe Capital Corp (NASDAQ:MRCC), which was worth $1.1 million at the end of the third quarter. On the second spot was Two Sigma Advisors which amassed $0.6 million worth of shares. D E Shaw, Paloma Partners, and Millennium Management 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 McKinley Capital Management allocated the biggest weight to Monroe Capital Corp (NASDAQ:MRCC), around 0.08% of its 13F portfolio. Paloma Partners is also relatively very bullish on the stock, setting aside 0.01 percent of its 13F equity portfolio to MRCC.
As one would reasonably expect, key hedge funds were breaking ground themselves. Paloma Partners, managed by Donald Sussman, established the most valuable position in Monroe Capital Corp (NASDAQ:MRCC). Paloma Partners had $0.3 million invested in the company at the end of the quarter. Israel Englander’s Millennium Management also initiated a $0.1 million position during the quarter. The only other fund with a brand new MRCC position is Michael Gelband’s ExodusPoint Capital.
Let’s now take a look at hedge fund activity in other stocks similar to Monroe Capital Corp (NASDAQ:MRCC). We will take a look at Bankwell Financial Group, Inc. (NASDAQ:BWFG), Tuscan Holdings Corp. II (NASDAQ:THCA), Saratoga Investment Corp (NYSE:SAR), and Castle Brands Inc (NYSE:ROX). This group of stocks’ market valuations match MRCC’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| BWFG | 6 | 45471 | 1 |
| THCA | 9 | 31142 | 9 |
| SAR | 5 | 6996 | 3 |
| ROX | 9 | 8244 | 5 |
| Average | 7.25 | 22963 | 4.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 7.25 hedge funds with bullish positions and the average amount invested in these stocks was $23 million. That figure was $3 million in MRCC’s case. Tuscan Holdings Corp. II (NASDAQ:THCA) is the most popular stock in this table. On the other hand Saratoga Investment Corp (NYSE:SAR) is the least popular one with only 5 bullish hedge fund positions. Monroe Capital Corp (NASDAQ:MRCC) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on MRCC, though not to the same extent, as the stock returned 7.1% during the first two months of the fourth quarter and outperformed the market.
Disclosure: None. This article was originally published at Insider Monkey.
