Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts, usually don't make them change their opinion towards a company. This time it may be different. During the fourth quarter of 2018 we observed increased volatility and small-cap stocks underperformed the market. Things completely reversed during the first half of 2019. Hedge fund investor letters indicated that they are cutting their overall exposure, closing out some position and doubling down on others. Let’s take a look at the hedge fund sentiment towards Capital Southwest Corporation (NASDAQ:CSWC) to find out whether it was one of their high conviction long-term ideas.
Capital Southwest Corporation (NASDAQ:CSWC) investors should pay attention to an increase in hedge fund sentiment of late. Our calculations also showed that CSWC 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 other investors who track every movement of the 25 largest hedge funds, our long-short investment strategy relies on hedge fund buy/sell signals given by the 100 best performing hedge funds. We're going to take a gander at the fresh hedge fund action surrounding Capital Southwest Corporation (NASDAQ:CSWC).
How are hedge funds trading Capital Southwest Corporation (NASDAQ:CSWC)?
At the end of the second quarter, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of 43% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards CSWC over the last 16 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 Insider Monkey's hedge fund database, Moab Capital Partners, managed by Michael M. Rothenberg, holds the most valuable position in Capital Southwest Corporation (NASDAQ:CSWC). Moab Capital Partners has a $19.1 million position in the stock, comprising 6.2% of its 13F portfolio. On Moab Capital Partners's heels is Ariel Investments, led by John W. Rogers, holding a $12.6 million position; the fund has 0.2% of its 13F portfolio invested in the stock. Other professional money managers that hold long positions consist of Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, Louis Navellier's Navellier & Associates and Amit Wadhwaney's Moerus Capital Management.
As industrywide interest jumped, specific money managers have been driving this bullishness. Millennium Management, managed by Israel Englander, assembled the most outsized position in Capital Southwest Corporation (NASDAQ:CSWC). Millennium Management had $2.3 million invested in the company at the end of the quarter. John Overdeck and David Siegel's Two Sigma Advisors also initiated a $0.4 million position during the quarter. The only other fund with a new position in the stock is Paul Marshall and Ian Wace's Marshall Wace LLP.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Capital Southwest Corporation (NASDAQ:CSWC) but similarly valued. These stocks are Sterling Construction Company, Inc. (NASDAQ:STRL), Purple Innovation, Inc. (NASDAQ:PRPL), Scorpio Bulkers Inc (NYSE:SALT), and Spirit MTA REIT (NYSE:SMTA). This group of stocks' market valuations are closest to CSWC's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position STRL,14,45091,-1 PRPL,3,41911,-1 SALT,10,18316,3 SMTA,19,112723,-2 Average,11.5,54510,-0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 11.5 hedge funds with bullish positions and the average amount invested in these stocks was $55 million. That figure was $47 million in CSWC's case. Spirit MTA REIT (NYSE:SMTA) is the most popular stock in this table. On the other hand Purple Innovation, Inc. (NASDAQ:PRPL) is the least popular one with only 3 bullish hedge fund positions. Capital Southwest Corporation (NASDAQ:CSWC) is not the least popular stock in this group but hedge fund interest is still below 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. A small number of hedge funds were also right about betting on CSWC as the stock returned 6.5% during the same time frame and outperformed the market by an even larger margin.
Disclosure: None. This article was originally published at Insider Monkey.