Here is What Hedge Funds Think About New Mountain Finance Corp. (NMFC)

In this article we will check out the progression of hedge fund sentiment towards New Mountain Finance Corp. (NYSE:NMFC) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Is New Mountain Finance Corp. (NYSE:NMFC) a marvelous investment right now? Hedge funds were getting more optimistic. The number of bullish hedge fund positions advanced by 1 in recent months. New Mountain Finance Corp. (NYSE:NMFC) was in 10 hedge funds’ portfolios at the end of June. The all time high for this statistic is 17. Our calculations also showed that NMFC isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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 S&P 500 ETFs by 79 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.

Richard Chilton of Chilton Investment Company

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Keeping this in mind we’re going to review the latest hedge fund action encompassing New Mountain Finance Corp. (NYSE:NMFC).

Do Hedge Funds Think NMFC Is A Good Stock To Buy Now?

At the end of the second quarter, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 11% from the first quarter of 2020. By comparison, 10 hedge funds held shares or bullish call options in NMFC a year ago. With the smart money’s capital changing hands, there exists an “upper tier” of key hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

More specifically, Arrowstreet Capital was the largest shareholder of New Mountain Finance Corp. (NYSE:NMFC), with a stake worth $8 million reported as of the end of June. Trailing Arrowstreet Capital was Two Sigma Advisors, which amassed a stake valued at $6.2 million. Chilton Investment Company, McKinley Capital Management, and D E Shaw 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 New Mountain Finance Corp. (NYSE:NMFC), around 0.14% of its 13F portfolio. Chilton Investment Company is also relatively very bullish on the stock, designating 0.11 percent of its 13F equity portfolio to NMFC.

With a general bullishness amongst the heavyweights, some big names were leading the bulls’ herd. Citadel Investment Group, managed by Ken Griffin, assembled the most outsized call position in New Mountain Finance Corp. (NYSE:NMFC). Citadel Investment Group had $0.2 million invested in the company at the end of the quarter. Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors also initiated a $0.2 million position during the quarter. The only other fund with a brand new NMFC position is Matthew L Pinz’s Pinz Capital.

Let’s now take a look at hedge fund activity in other stocks similar to New Mountain Finance Corp. (NYSE:NMFC). We will take a look at Cambium Networks Corporation (NASDAQ:CMBM), Grupo Financiero Galicia S.A. (NASDAQ:GGAL), Schweitzer-Mauduit International, Inc. (NYSE:SWM), TriCo Bancshares (NASDAQ:TCBK), Zumiez Inc. (NASDAQ:ZUMZ), US Concrete Inc (NASDAQ:USCR), and Enova International Inc (NYSE:ENVA). This group of stocks’ market valuations resemble NMFC’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.1 hedge funds with bullish positions and the average amount invested in these stocks was $92 million. That figure was $24 million in NMFC’s case. Cambium Networks Corporation (NASDAQ:CMBM) is the most popular stock in this table. On the other hand Grupo Financiero Galicia S.A. (NASDAQ:GGAL) is the least popular one with only 7 bullish hedge fund positions. New Mountain Finance Corp. (NYSE:NMFC) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for NMFC is 33. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 25.7% in 2021 through September 27th and beat the market by 6.2 percentage points. A small number of hedge funds were also right about betting on NMFC, though not to the same extent, as the stock returned 3.9% since the end of Q2 (through September 27th) and outperformed the market.

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

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