Is Saratoga Investment Corp (SAR) Going to Burn These Hedge Funds?

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Saratoga Investment Corp (NYSE:SAR).

Is Saratoga Investment Corp (NYSE:SAR) a good investment today? Hedge funds were taking a pessimistic view. The number of bullish hedge fund positions dropped by 2 in recent months. Saratoga Investment Corp (NYSE:SAR) was in 5 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistics is 7. Our calculations also showed that SAR isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks). There were 7 hedge funds in our database with SAR holdings at the end of June.

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 66 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Ian Wace of Marshall Wace

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. 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 website. With all of this in mind let’s go over the latest hedge fund action surrounding Saratoga Investment Corp (NYSE:SAR).

Hedge fund activity in Saratoga Investment Corp (NYSE:SAR)

At third quarter’s end, a total of 5 of the hedge funds tracked by Insider Monkey were long this stock, a change of -29% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in SAR over the last 21 quarters. With the smart money’s sentiment swirling, there exists a few noteworthy hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

The largest stake in Saratoga Investment Corp (NYSE:SAR) was held by Callodine Capital Management, which reported holding $3.4 million worth of stock at the end of September. It was followed by Marshall Wace LLP with a $1.1 million position. Other investors bullish on the company included D E Shaw, Two Sigma Advisors, and Millennium Management. In terms of the portfolio weights assigned to each position Callodine Capital Management allocated the biggest weight to Saratoga Investment Corp (NYSE:SAR), around 1.82% of its 13F portfolio. Marshall Wace LLP is also relatively very bullish on the stock, dishing out 0.01 percent of its 13F equity portfolio to SAR.

Due to the fact that Saratoga Investment Corp (NYSE:SAR) has experienced a decline in interest from the entirety of the hedge funds we track, it’s easy to see that there is a sect of money managers who were dropping their entire stakes last quarter. At the top of the heap, David Harding’s Winton Capital Management cut the largest stake of the 750 funds followed by Insider Monkey, comprising close to $1.2 million in stock. Michael Gelband’s fund, ExodusPoint Capital, also dumped its stock, about $0.4 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest was cut by 2 funds last quarter.

Let’s check out hedge fund activity in other stocks similar to Saratoga Investment Corp (NYSE:SAR). These stocks are Nymox Pharmaceutical Corporation (NASDAQ:NYMX), PolyPid Ltd. (NASDAQ:PYPD), The Cato Corporation (NYSE:CATO), Trecora Resources (NYSE:TREC), Southern First Bancshares, Inc. (NASDAQ:SFST), Hurco Companies, Inc. (NASDAQ:HURC), and RCI Hospitality Holdings, Inc. (NASDAQ:RICK). This group of stocks’ market valuations resemble SAR’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 5.1 hedge funds with bullish positions and the average amount invested in these stocks was $15 million. That figure was $6 million in SAR’s case. The Cato Corporation (NYSE:CATO) is the most popular stock in this table. On the other hand Nymox Pharmaceutical Corporation (NASDAQ:NYMX) is the least popular one with only 1 bullish hedge fund positions. Saratoga Investment Corp (NYSE:SAR) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for SAR is 42.6. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 30.7% in 2020 through November 27th and still beat the market by 16.1 percentage points. A small number of hedge funds were also right about betting on SAR as the stock returned 36.2% since the end of the third quarter (through 11/27) and outperformed the market by an even larger margin.

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