Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let’s analyze whether Prospect Capital Corporation (NASDAQ:PSEC) is a good investment right now by following the lead of some of the best investors in the world and piggybacking their ideas. There’s no better way to get these firms’ immense resources and analytical capabilities working for us than to follow their lead into their best ideas. While not all of these picks will be winners, our research shows that these picks historically outperformed the market when we factor in known risk factors.
Prospect Capital Corporation (NASDAQ:PSEC) has experienced an increase in hedge fund interest recently. Our calculations also showed that PSEC isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 72.9% since March 2017 and outperformed the S&P 500 ETFs by more than 41 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
John Overdeck of Two Sigma Advisors
We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. 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 S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now let’s go over the new hedge fund action encompassing Prospect Capital Corporation (NASDAQ:PSEC).
What does smart money think about Prospect Capital Corporation (NASDAQ:PSEC)?
At Q4’s end, a total of 15 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 25% from the third quarter of 2019. Below, you can check out the change in hedge fund sentiment towards PSEC over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Prospect Capital Corporation (NASDAQ:PSEC) was held by Arrowstreet Capital, which reported holding $36.3 million worth of stock at the end of September. It was followed by GLG Partners with a $12.4 million position. Other investors bullish on the company included Scopia Capital, Two Sigma Advisors, and McKinley Capital Management. In terms of the portfolio weights assigned to each position Scopia Capital allocated the biggest weight to Prospect Capital Corporation (NASDAQ:PSEC), around 0.5% of its 13F portfolio. Neo Ivy Capital is also relatively very bullish on the stock, designating 0.36 percent of its 13F equity portfolio to PSEC.
As aggregate interest increased, key hedge funds were breaking ground themselves. ExodusPoint Capital, managed by Michael Gelband, assembled the most valuable position in Prospect Capital Corporation (NASDAQ:PSEC). ExodusPoint Capital had $1.2 million invested in the company at the end of the quarter. Israel Englander’s Millennium Management also initiated a $0.9 million position during the quarter. The other funds with brand new PSEC positions are Renee Yao’s Neo Ivy Capital and Bruce Kovner’s Caxton Associates LP.
Let’s go over hedge fund activity in other stocks similar to Prospect Capital Corporation (NASDAQ:PSEC). These stocks are ExlService Holdings, Inc. (NASDAQ:EXLS), Varonis Systems Inc (NASDAQ:VRNS), SSR Mining Inc. (NASDAQ:SSRM), and Livongo Health, Inc. (NASDAQ:LVGO). All of these stocks’ market caps resemble PSEC’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| EXLS | 18 | 48631 | 2 |
| VRNS | 18 | 455392 | -7 |
| SSRM | 16 | 229804 | 1 |
| LVGO | 18 | 100042 | 2 |
| Average | 17.5 | 208467 | -0.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 17.5 hedge funds with bullish positions and the average amount invested in these stocks was $208 million. That figure was $73 million in PSEC’s case. ExlService Holdings, Inc. (NASDAQ:EXLS) is the most popular stock in this table. On the other hand SSR Mining Inc. (NASDAQ:SSRM) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks Prospect Capital Corporation (NASDAQ:PSEC) is even less popular than SSRM. Hedge funds dodged a bullet by taking a bearish stance towards PSEC. Our calculations showed that the top 20 most popular hedge fund stocks returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th but managed to beat the market by 4.2 percentage points. Unfortunately PSEC wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); PSEC investors were disappointed as the stock returned -39.4% 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 20 most popular stocks among hedge funds as most of these stocks already outperformed the market so far in 2020.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
