Is Prospect Capital Corporation (PSEC) A Good Stock To Buy?

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. The Standard and Poor’s 500 Index returned 5.2% over the 12-month period ending October 30, while more than 51% of the constituents of the index underperformed the benchmark. Hence, a random stock picking process will most likely lead to disappointment. At the same time, the 30 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey (as of September 2014) generated a return of 9.5% over the same time span, with 63% of these stocks outperforming the benchmark. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That’s why we are going to go over recent hedge fund activity in Prospect Capital Corporation (NASDAQ:PSEC).

Prospect Capital Corporation (NASDAQ:PSEC) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 12 hedge funds’ portfolios at the end of September. At the end of this article we will also compare PSEC to other stocks including Ryman Hospitality Properties, Inc. (REIT) (NYSE:RHP), MFA Financial, Inc. (NYSE:MFA), and Sunoco LP (NYSE:SUN) to get a better sense of its popularity.

To most shareholders, hedge funds are perceived as unimportant, old financial tools of yesteryear. While there are over an 8000 funds with their doors open today, Our researchers choose to focus on the crème de la crème of this group, around 700 funds. These money managers handle the lion’s share of all hedge funds’ total capital, and by following their finest stock picks, Insider Monkey has come up with various investment strategies that have historically defeated Mr. Market. Insider Monkey’s small-cap hedge fund strategy outstripped the S&P 500 index by 12 percentage points a year for a decade in their back tests.

Keeping this in mind, we’re going to view the key action regarding Prospect Capital Corporation (NASDAQ:PSEC).

Hedge fund activity in Prospect Capital Corporation (NASDAQ:PSEC)

At Q3’s end, a total of 12 of the hedge funds tracked by Insider Monkey were bullish on this stock, unchanged from the previous quarter. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Scopia Capital, managed by Matt Sirovich and Jeremy Mindich, holds the number one position in Prospect Capital Corporation (NASDAQ:PSEC). Scopia Capital has a $16.1 million position in the stock, comprising 0.3% of its 13F portfolio. The second most bullish fund manager is Mangrove Partners, led by Nathaniel August, holding a $5.4 million position; the fund has 1.2% of its 13F portfolio invested in the stock. Some other peers that are bullish contain David Dreman’s Dreman Value Management, Ken Griffin’s Citadel Investment Group and Robert B. Gillam’s McKinley Capital Management.

Judging by the fact that Prospect Capital Corporation (NASDAQ:PSEC) has faced declining sentiment from the aggregate hedge fund industry, it’s safe to say that there was a specific group of money managers who sold off their entire stakes in the third quarter. Intriguingly, Peter Muller’s PDT Partners dropped the largest investment of the “upper crust” of funds watched by Insider Monkey, valued at close to $1.7 million in stock. Paul Tudor Jones’ fund, Tudor Investment Corp, also sold off its stock, about $0.7 million worth. These transactions are interesting, 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. These stocks are Ryman Hospitality Properties, Inc. (REIT) (NYSE:RHP), MFA Financial, Inc. (NYSE:MFA), Sunoco LP (NYSE:SUN), and Golar LNG Limited (USA) (NASDAQ:GLNG). All of these stocks’ market caps are similar to PSEC’s market cap.

As you can see these stocks had an average of 21 hedge funds with bullish positions and the average amount invested in these stocks was $312 million, compared to just $28 million in PSEC’s case. Golar LNG Limited (USA) (NASDAQ:GLNG) is the most popular stock in this table and Sunoco LP (NYSE:SUN) is the least popular one with only 10 bullish hedge fund positions. Prospect Capital Corporation (NASDAQ:PSEC) is not the least popular stock in this group, but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard GLNG might be a better candidate to consider a long position.