Before putting in our own effort and resources into finding a good investment, we can quickly utilize hedge fund expertise to give us a quick glimpse of whether that stock could make for a good addition to our portfolios. The odds are not exactly stacked in investors' favor when it comes to beating the market, as evidenced by the fact that less than 49% of the stocks in the S&P 500 did so during the second quarter. The stats were even worse in recent years when most of the advances in the market were due to large gains by FAANG stocks. However, one bright side for individual investors was the strong performance of hedge funds' top consensus picks. This year hedge funds' top 20 stock picks outperformed the S&P 500 Index by 6.6 percentage points through May 30th. Thus, we can see that the tireless research and efforts of hedge funds to identify winning stocks can work to our advantage when we know how to use the data. While not all of their picks will be winners, our odds are much better following their best stock picks than trying to go it alone.
FS KKR Capital Corp. (NYSE:FSK) was in 19 hedge funds' portfolios at the end of the first quarter of 2019. FSK has seen a decrease in enthusiasm from smart money in recent months. There were 20 hedge funds in our database with FSK positions at the end of the previous quarter. Our calculations also showed that fsk isn't among the 30 most popular stocks among hedge funds.
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.
Let's take a gander at the recent hedge fund action surrounding FS KKR Capital Corp. (NYSE:FSK).
How have hedgies been trading FS KKR Capital Corp. (NYSE:FSK)?
At the end of the first quarter, a total of 19 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -5% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards FSK over the last 15 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).
More specifically, Beach Point Capital Management was the largest shareholder of FS KKR Capital Corp. (NYSE:FSK), with a stake worth $99.1 million reported as of the end of March. Trailing Beach Point Capital Management was HBK Investments, which amassed a stake valued at $46.5 million. Citadel Investment Group, Almitas Capital, and McKinley Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.
Judging by the fact that FS KKR Capital Corp. (NYSE:FSK) has faced declining sentiment from hedge fund managers, it's easy to see that there was a specific group of money managers that decided to sell off their positions entirely in the third quarter. At the top of the heap, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital dumped the biggest position of all the hedgies tracked by Insider Monkey, valued at an estimated $10.1 million in stock, and Andrew Weiss's Weiss Asset Management was right behind this move, as the fund dropped about $4 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 1 funds in the third quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as FS KKR Capital Corp. (NYSE:FSK) but similarly valued. These stocks are Apergy Corporation (NYSE:APY), Manchester United PLC (NYSE:MANU), RBC Bearings Incorporated (NASDAQ:ROLL), and Tempur Sealy International Inc. (NYSE:TPX). This group of stocks' market valuations are closest to FSK's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position APY,12,126003,-1 MANU,11,51988,2 ROLL,11,55043,5 TPX,29,1175502,-2 Average,15.75,352134,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 15.75 hedge funds with bullish positions and the average amount invested in these stocks was $352 million. That figure was $202 million in FSK's case. Tempur Sealy International Inc. (NYSE:TPX) is the most popular stock in this table. On the other hand Manchester United PLC (NYSE:MANU) is the least popular one with only 11 bullish hedge fund positions. FS KKR Capital Corp. (NYSE:FSK) 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 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on FSK, though not to the same extent, as the stock returned -0.8% during the same time frame and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.