Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before the Q4 market crash that the stock market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the first half of 2019, most investors recovered all of their Q4 losses as sentiment shifted and optimism dominated the US China trade negotiations. Nevertheless, many of the stocks that delivered strong returns in the first half still sport strong fundamentals and their gains were more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to Ares Capital Corporation (NASDAQ:ARCC) changed recently.
Ares Capital Corporation (NASDAQ:ARCC) shareholders have witnessed an increase in enthusiasm from smart money of late. Our calculations also showed that ARCC 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.
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 25.8% year to date (through May 30th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 40 percentage points since its inception (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Unlike this former hedge fund manager who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's take a gander at the fresh hedge fund action regarding Ares Capital Corporation (NASDAQ:ARCC).
What have hedge funds been doing with Ares Capital Corporation (NASDAQ:ARCC)?
At Q2's end, a total of 23 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 5% from the first quarter of 2019. The graph below displays the number of hedge funds with bullish position in ARCC over the last 16 quarters. With hedgies' sentiment swirling, there exists a few noteworthy hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).
The largest stake in Ares Capital Corporation (NASDAQ:ARCC) was held by D E Shaw, which reported holding $99.6 million worth of stock at the end of March. It was followed by Clough Capital Partners with a $27.1 million position. Other investors bullish on the company included Arrowstreet Capital, Two Sigma Advisors, and Millennium Management.
Consequently, key money managers have been driving this bullishness. Tegean Capital Management, managed by Thomas G. Maheras, initiated the largest position in Ares Capital Corporation (NASDAQ:ARCC). Tegean Capital Management had $4.5 million invested in the company at the end of the quarter. David Andre and Astro Teller's Cerebellum Capital also initiated a $0.3 million position during the quarter. The other funds with new positions in the stock are Matthew Hulsizer's PEAK6 Capital Management and Steve Cohen's Point72 Asset Management.
Let's now take a look at hedge fund activity in other stocks similar to Ares Capital Corporation (NASDAQ:ARCC). These stocks are Kimco Realty Corp (NYSE:KIM), Store Capital Corporation (NYSE:STOR), Alliance Data Systems Corporation (NYSE:ADS), and Telecom Argentina S.A. (NYSE:TEO). This group of stocks' market caps resemble ARCC's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position KIM,19,112522,8 STOR,22,987824,0 ADS,34,1420142,-4 TEO,3,54171,-6 Average,19.5,643665,-0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 19.5 hedge funds with bullish positions and the average amount invested in these stocks was $644 million. That figure was $239 million in ARCC's case. Alliance Data Systems Corporation (NYSE:ADS) is the most popular stock in this table. On the other hand Telecom Argentina S.A. (NYSE:TEO) is the least popular one with only 3 bullish hedge fund positions. Ares Capital Corporation (NASDAQ:ARCC) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on ARCC as the stock returned 6.2% during the third quarter and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.