Concerns over rising interest rates and expected further rate increases have hit several stocks hard during the fourth quarter of 2018. Trends reversed 180 degrees in 2019 amid Powell’s pivot and optimistic expectations towards a trade deal with China. Hedge funds and institutional investors tracked by Insider Monkey usually invest a disproportionate amount of their portfolios in smaller cap stocks. We have been receiving indications that hedge funds were increasing their overall exposure in the third quarter and this is one of the factors behind the recent movements in major indices. In this article, we will take a closer look at hedge fund sentiment towards Source Capital, Inc. (NYSE:SOR).
Hedge fund interest in Source Capital, Inc. (NYSE:SOR) shares was flat at the end of last quarter. This is usually a negative indicator. 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 Zynex, Inc. (NASDAQ:ZYXI), Gritstone Oncology, Inc. (NASDAQ:GRTS), and Braemar Hotels & Resorts Inc. (NYSE:BHR) to gather more data points. Our calculations also showed that SOR isn’t among the 30 most popular stocks among hedge funds (see the video below).
Video: Click the image to 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 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
Phillip Goldstein of Bulldog Investors
We’re going to go over the key hedge fund action surrounding Source Capital, Inc. (NYSE:SOR).
What have hedge funds been doing with Source Capital, Inc. (NYSE:SOR)?
At the end of the third quarter, a total of 2 of the hedge funds tracked by Insider Monkey were long this stock, the same as the second quarter of 2019. By comparison, 1 hedge funds held shares or bullish call options in SOR a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).
More specifically, Bulldog Investors was the largest shareholder of Source Capital, Inc. (NYSE:SOR), with a stake worth $7.8 million reported as of the end of September. Trailing Bulldog Investors was GRT Capital Partners, which amassed a stake valued at $0.6 million.
Earlier we told you that the aggregate hedge fund interest in the stock was unchanged and we view this as a negative development. Even though there weren’t any hedge funds dumping their holdings during the third quarter, there weren’t any hedge funds initiating brand new positions. This indicates that hedge funds, at the very best, perceive this stock as dead money and they haven’t identified any viable catalysts that can attract investor attention.
Let’s check out hedge fund activity in other stocks similar to Source Capital, Inc. (NYSE:SOR). We will take a look at Zynex, Inc. (NASDAQ:ZYXI), Gritstone Oncology, Inc. (NASDAQ:GRTS), Braemar Hotels & Resorts Inc. (NYSE:BHR), and Castle Biosciences, Inc. (NASDAQ:CSTL). All of these stocks’ market caps resemble SOR’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ZYXI | 7 | 6867 | 3 |
| GRTS | 8 | 67140 | 0 |
| BHR | 13 | 55948 | -2 |
| CSTL | 12 | 38901 | 12 |
| Average | 10 | 42214 | 3.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 10 hedge funds with bullish positions and the average amount invested in these stocks was $42 million. That figure was $8 million in SOR’s case. Braemar Hotels & Resorts Inc. (NYSE:BHR) is the most popular stock in this table. On the other hand Zynex, Inc. (NASDAQ:ZYXI) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks Source Capital, Inc. (NYSE:SOR) is even less popular than ZYXI. Hedge funds dodged a bullet by taking a bearish stance towards SOR. Our calculations showed that the top 20 most popular hedge fund stocks returned 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. Unfortunately SOR wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); SOR investors were disappointed as the stock returned 4.2% during the fourth quarter (through 11/22) 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 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.