Should I Buy Prospect Capital Corporation (PSEC)?

The Insider Monkey team has completed processing the quarterly 13F filings for the September quarter submitted by the hedge funds and other money managers included in our extensive database. Most hedge fund investors experienced strong gains on the back of a strong market performance, which certainly propelled them to adjust their equity holdings so as to maintain the desired risk profile. As a result, the relevancy of these public filings and their content is indisputable, as they may reveal numerous high-potential stocks. The following article will discuss the smart money sentiment towards Prospect Capital Corporation (NASDAQ:PSEC).

Hedge fund interest in Prospect Capital Corporation (NASDAQ:PSEC) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that PSEC 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). 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 Pacific Biosciences of California (NASDAQ:PACB), CommVault Systems, Inc. (NASDAQ:CVLT), and Bed Bath & Beyond Inc. (NASDAQ:BBBY) to gather more data points.

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.

David Siegel of Two Sigma Advisors

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. Keeping this in mind let’s go over the latest hedge fund action encompassing Prospect Capital Corporation (NASDAQ:PSEC).

What does smart money think about Prospect Capital Corporation (NASDAQ:PSEC)?

At the end of September, a total of 7 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in PSEC over the last 21 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, holds the biggest position in Prospect Capital Corporation (NASDAQ:PSEC). Arrowstreet Capital has a $6.7 million position in the stock, comprising less than 0.1%% of its 13F portfolio. Coming in second is John Overdeck and David Siegel of Two Sigma Advisors, with a $3.8 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Some other members of the smart money with similar optimism encompass Robert B. Gillam’s McKinley Capital Management, and Michael Gelband’s ExodusPoint Capital. In terms of the portfolio weights assigned to each position McKinley Capital Management allocated the biggest weight to Prospect Capital Corporation (NASDAQ:PSEC), around 0.24% of its 13F portfolio. Two Sigma Advisors is also relatively very bullish on the stock, earmarking 0.01 percent of its 13F equity portfolio to PSEC.

Due to the fact that Prospect Capital Corporation (NASDAQ:PSEC) has experienced a decline in interest from hedge fund managers, it’s easy to see that there exists a select few hedge funds who were dropping their entire stakes last quarter. Interestingly, Andrew Weiss’s Weiss Asset Management cut the largest investment of all the hedgies monitored by Insider Monkey, totaling close to $3.9 million in stock. Israel Englander’s fund, Millennium Management, also said goodbye to its stock, about $0.1 million worth. These bearish behaviors are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s check out hedge fund activity in other stocks similar to Prospect Capital Corporation (NASDAQ:PSEC). These stocks are Pacific Biosciences of California (NASDAQ:PACB), CommVault Systems, Inc. (NASDAQ:CVLT), Bed Bath & Beyond Inc. (NASDAQ:BBBY), Summit Materials Inc (NYSE:SUM), Shutterstock Inc (NYSE:SSTK), Bottomline Technologies (NASDAQ:EPAY), and 21Vianet Group Inc (NASDAQ:VNET). This group of stocks’ market caps match PSEC’s market cap.

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As you can see these stocks had an average of 25.1 hedge funds with bullish positions and the average amount invested in these stocks was $305 million. That figure was $14 million in PSEC’s case. Bed Bath & Beyond Inc. (NASDAQ:BBBY) is the most popular stock in this table. On the other hand Shutterstock Inc (NYSE:SSTK) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks Prospect Capital Corporation (NASDAQ:PSEC) is even less popular than SSTK. Our overall hedge fund sentiment score for PSEC is 19. 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. 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 31.6% in 2020 through December 2nd but managed to beat the market again by 16 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 8.2% since the end of the third quarter (through 12/2) 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 most of these stocks already outperformed the market so far in 2020.

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