At Insider Monkey we track the activity of some of the best-performing hedge funds like Appaloosa Management, Baupost, and Tiger Global because we determined that some of the stocks that they are collectively bullish on can help us generate returns above the broader indices. Out of thousands of stocks that hedge funds invest in, small-caps can provide the best returns over the long term due to the fact that these companies are less efficiently priced and are usually under the radars of mass-media, analysts and dumb money. This is why we follow the smart money moves in the small-cap space.
Prospect Capital Corporation (NASDAQ:PSEC) shares haven’t seen a lot of action during the first quarter. Overall, hedge fund sentiment was unchanged. The stock was in 11 hedge funds’ portfolios at the end of March. 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 Baozun Inc (NASDAQ:BZUN), EVO Payments, Inc. (NASDAQ:EVOP), and Mednax Inc. (NYSE:MD) to gather more data points.
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’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 30.9% through May 30, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Matthew Hulsizer of PEAK6 Capital
Let’s go over the recent hedge fund action surrounding Prospect Capital Corporation (NASDAQ:PSEC).
How are hedge funds trading Prospect Capital Corporation (NASDAQ:PSEC)?
Heading into the second quarter of 2019, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the fourth quarter of 2018. The graph below displays the number of hedge funds with bullish position in PSEC over the last 15 quarters. So, let’s examine 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 $6.7 million worth of stock at the end of March. It was followed by McKinley Capital Management with a $5.5 million position. Other investors bullish on the company included Citadel Investment Group, Two Sigma Advisors, and PEAK6 Capital Management.
Because Prospect Capital Corporation (NASDAQ:PSEC) has experienced a decline in interest from the smart money, it’s safe to say that there were a few funds who were dropping their positions entirely by the end of the third quarter. Intriguingly, Michael Hintze’s CQS Cayman LP dumped the biggest stake of the 700 funds followed by Insider Monkey, valued at close to $3.1 million in stock, and Howard Marks’s Oaktree Capital Management was right behind this move, as the fund dumped about $2.7 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Prospect Capital Corporation (NASDAQ:PSEC) but similarly valued. We will take a look at Baozun Inc (NASDAQ:BZUN), EVO Payments, Inc. (NASDAQ:EVOP), Mednax Inc. (NYSE:MD), and Inter Parfums, Inc. (NASDAQ:IPAR). This group of stocks’ market valuations are closest to PSEC’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| BZUN | 14 | 60742 | 0 |
| EVOP | 13 | 61327 | 3 |
| MD | 23 | 298044 | -2 |
| IPAR | 22 | 98080 | 11 |
| Average | 18 | 129548 | 3 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 18 hedge funds with bullish positions and the average amount invested in these stocks was $130 million. That figure was $17 million in PSEC’s case. Mednax Inc. (NYSE:MD) is the most popular stock in this table. On the other hand EVO Payments, Inc. (NASDAQ:EVOP) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks Prospect Capital Corporation (NASDAQ:PSEC) is even less popular than EVOP. 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 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 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 2.1% during the same time frame 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 13 of these stocks already outperformed the market so far in the second quarter.
Disclosure: None. This article was originally published at Insider Monkey.
