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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. Since stock returns aren't usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index's returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you'd fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of 4 percentage points during the first 9 months of 2019. 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 Golub Capital BDC Inc (NASDAQ:GBDC).
Golub Capital BDC Inc (NASDAQ:GBDC) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 8 hedge funds' portfolios at the end of June. At the end of this article we will also compare GBDC to other stocks including Primoris Services Corp (NASDAQ:PRIM), Tactile Systems Technology, Inc. (NASDAQ:TCMD), and Big Lots, Inc. (NYSE:BIG) to get a better sense of its popularity. Our calculations also showed that GBDC 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.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 market by 40 percentage points since May 2014 through May 30, 2019 (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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
Unlike former hedge manager, Dr. Steve Sjuggerud, 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. We're going to analyze the fresh hedge fund action encompassing Golub Capital BDC Inc (NASDAQ:GBDC).
What have hedge funds been doing with Golub Capital BDC Inc (NASDAQ:GBDC)?
At the end of the second quarter, a total of 8 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. The graph below displays the number of hedge funds with bullish position in GBDC over the last 16 quarters. With the smart money's capital changing hands, there exists an "upper tier" of noteworthy hedge fund managers who were adding to their holdings considerably (or already accumulated large positions).
Among these funds, Clough Capital Partners held the most valuable stake in Golub Capital BDC Inc (NASDAQ:GBDC), which was worth $18.9 million at the end of the second quarter. On the second spot was D E Shaw which amassed $7.5 million worth of shares. Moreover, Citadel Investment Group, McKinley Capital Management, and Polar Capital were also bullish on Golub Capital BDC Inc (NASDAQ:GBDC), allocating a large percentage of their portfolios to this stock.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: ExodusPoint Capital. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because only one of the 800+ hedge funds tracked by Insider Monkey identified as a viable investment and initiated a position in the stock (that fund was Two Sigma Advisors).
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Golub Capital BDC Inc (NASDAQ:GBDC) but similarly valued. These stocks are Primoris Services Corp (NASDAQ:PRIM), Tactile Systems Technology, Inc. (NASDAQ:TCMD), Big Lots, Inc. (NYSE:BIG), and Independence Realty Trust Inc (NYSE:IRT). This group of stocks' market caps are closest to GBDC's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PRIM,12,30523,2 TCMD,15,60665,-2 BIG,20,117046,0 IRT,8,65969,-3 Average,13.75,68551,-0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.75 hedge funds with bullish positions and the average amount invested in these stocks was $69 million. That figure was $39 million in GBDC's case. Big Lots, Inc. (NYSE:BIG) is the most popular stock in this table. On the other hand Independence Realty Trust Inc (NYSE:IRT) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Golub Capital BDC Inc (NASDAQ:GBDC) is even less popular than IRT. Hedge funds clearly dropped the ball on GBDC as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. 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. A small number of hedge funds were also right about betting on GBDC as the stock returned 7.7% during the third quarter and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.
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