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 Bain Capital Specialty Finance, Inc. (NYSE:BCSF).
Is Bain Capital Specialty Finance, Inc. (NYSE:BCSF) an attractive stock to buy now? Investors who are in the know are taking an optimistic view. The number of long hedge fund positions went up by 2 in recent months. Our calculations also showed that BCSF isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). BCSF was in 7 hedge funds’ portfolios at the end of the third quarter of 2019. There were 5 hedge funds in our database with BCSF holdings at the end of the previous quarter.
Video: Click the image to 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 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. 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.
Israel Englander of Millennium Management
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 based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. Let’s take a glance at the latest hedge fund action surrounding Bain Capital Specialty Finance, Inc. (NYSE:BCSF).
How have hedgies been trading Bain Capital Specialty Finance, Inc. (NYSE:BCSF)?
At the end of the third quarter, a total of 7 of the hedge funds tracked by Insider Monkey were long this stock, a change of 40% from one quarter earlier. By comparison, 0 hedge funds held shares or bullish call options in BCSF a year ago. With the smart money’s capital changing hands, there exists an “upper tier” of notable hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Derek C. Schrier’s Indaba Capital Management has the number one position in Bain Capital Specialty Finance, Inc. (NYSE:BCSF), worth close to $22 million, amounting to 5.1% of its total 13F portfolio. Coming in second is Peter Rathjens, Bruce Clarke and John Campbell of Arrowstreet Capital, with a $8.6 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Other members of the smart money with similar optimism consist of Israel Englander’s Millennium Management, Ken Griffin’s Citadel Investment Group and Daniel Johnson’s Gillson Capital. In terms of the portfolio weights assigned to each position Indaba Capital Management allocated the biggest weight to Bain Capital Specialty Finance, Inc. (NYSE:BCSF), around 5.13% of its 13F portfolio. Gillson Capital is also relatively very bullish on the stock, setting aside 0.17 percent of its 13F equity portfolio to BCSF.
As aggregate interest increased, some big names have been driving this bullishness. ExodusPoint Capital, managed by Michael Gelband, created the most outsized position in Bain Capital Specialty Finance, Inc. (NYSE:BCSF). ExodusPoint Capital had $0.2 million invested in the company at the end of the quarter. Gavin Saitowitz and Cisco J. del Valle’s Springbok Capital also made a $0.1 million investment in the stock during the quarter.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Bain Capital Specialty Finance, Inc. (NYSE:BCSF) but similarly valued. We will take a look at Lantheus Holdings Inc (NASDAQ:LNTH), Greenbrier Companies Inc (NYSE:GBX), Boston Private Financial Hldg Inc (NASDAQ:BPFH), and Infinera Corp. (NASDAQ:INFN). This group of stocks’ market valuations are closest to BCSF’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| LNTH | 13 | 101269 | -2 |
| GBX | 8 | 21653 | -6 |
| BPFH | 13 | 66868 | 0 |
| INFN | 18 | 175494 | 7 |
| Average | 13 | 91321 | -0.25 |
View table here if you experience formatting issues.
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 $91 million. That figure was $38 million in BCSF’s case. Infinera Corp. (NASDAQ:INFN) is the most popular stock in this table. On the other hand Greenbrier Companies Inc (NYSE:GBX) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Bain Capital Specialty Finance, Inc. (NYSE:BCSF) is even less popular than GBX. Hedge funds dodged a bullet by taking a bearish stance towards BCSF. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately BCSF wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); BCSF investors were disappointed as the stock returned 3% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
