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Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by more than 10 percentage points since the end of the third quarter of 2018 as investors first worried over the possible ramifications of rising interest rates and the escalation of the trade war with China. The hedge funds and institutional investors we track typically invest more in smaller-cap stocks than an average investor (i.e. only about 60% S&P 500 constituents were among the 500 most popular stocks among hedge funds), and we have seen data that shows those funds paring back their overall exposure. Those funds cutting positions in small-caps is one reason why volatility has increased. In the following paragraphs, we take a closer look at what hedge funds and prominent investors think of Capital Southwest Corporation (NASDAQ:CSWC) and see how the stock is affected by the recent hedge fund activity.
Capital Southwest Corporation (NASDAQ:CSWC) has seen a decrease in hedge fund sentiment recently. CSWC was in 9 hedge funds' portfolios at the end of September. There were 10 hedge funds in our database with CSWC holdings at the end of the previous quarter. Our calculations also showed that CSWC isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
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 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
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Israel Englander of Millennium Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December we recommended Adams Energy based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. We're going to take a look at the new hedge fund action surrounding Capital Southwest Corporation (NASDAQ:CSWC).
Hedge fund activity in Capital Southwest Corporation (NASDAQ:CSWC)
At the end of the third quarter, a total of 9 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -10% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in CSWC over the last 17 quarters. With hedgies' sentiment swirling, there exists an "upper tier" of key hedge fund managers who were upping their holdings considerably (or already accumulated large positions).
Among these funds, Moab Capital Partners held the most valuable stake in Capital Southwest Corporation (NASDAQ:CSWC), which was worth $16.7 million at the end of the third quarter. On the second spot was Millennium Management which amassed $5 million worth of shares. Ariel Investments, Arrowstreet Capital, and Navellier & Associates were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Moab Capital Partners allocated the biggest weight to Capital Southwest Corporation (NASDAQ:CSWC), around 6.36% of its 13F portfolio. Moerus Capital Management is also relatively very bullish on the stock, dishing out 1.04 percent of its 13F equity portfolio to CSWC.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Marshall Wace. 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 none of the 750+ hedge funds tracked by Insider Monkey identified CSWC as a viable investment and initiated a position in the stock.
Let's now review hedge fund activity in other stocks similar to Capital Southwest Corporation (NASDAQ:CSWC). We will take a look at Oppenheimer Holdings Inc. (NYSE:OPY), Greenlight Capital Re, Ltd. (NASDAQ:GLRE), Unisys Corporation (NYSE:UIS), and Collegium Pharmaceutical Inc (NASDAQ:COLL). All of these stocks' market caps are similar to CSWC's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position OPY,9,33323,0 GLRE,12,11627,4 UIS,24,43021,8 COLL,13,63291,-3 Average,14.5,37816,2.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.5 hedge funds with bullish positions and the average amount invested in these stocks was $38 million. That figure was $40 million in CSWC's case. Unisys Corporation (NYSE:UIS) is the most popular stock in this table. On the other hand Oppenheimer Holdings Inc. (NYSE:OPY) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Capital Southwest Corporation (NASDAQ:CSWC) is even less popular than OPY. Hedge funds dodged a bullet by taking a bearish stance towards CSWC. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately CSWC wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); CSWC investors were disappointed as the stock returned 1.4% during the fourth quarter (through the end of November) 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.