How do you pick the next stock to invest in? One way would be to spend hours of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Goldman Sachs BDC, Inc. (NYSE:GSBD).
Hedge fund interest in Goldman Sachs BDC, Inc. (NYSE:GSBD) shares was flat at the end of last quarter. This is usually a negative indicator. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as CSW Industrials, Inc. (NASDAQ:CSWI), Meridian Bioscience, Inc. (NASDAQ:VIVO), and Summit Midstream Partners LP (NYSE:SMLP) to gather more data points.
Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 32 percentage points since May 2014 through March 12, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.5% through March 12, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Let's analyze the key hedge fund action regarding Goldman Sachs BDC, Inc. (NYSE:GSBD).
What does the smart money think about Goldman Sachs BDC, Inc. (NYSE:GSBD)?
Heading into the first quarter of 2019, a total of 4 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards GSBD over the last 14 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Goldman Sachs BDC, Inc. (NYSE:GSBD) was held by McKinley Capital Management, which reported holding $3.4 million worth of stock at the end of December. It was followed by Citadel Investment Group with a $0.7 million position. Other investors bullish on the company included Marshall Wace LLP and Millennium Management.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Steelhead Partners. 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 Marshall Wace LLP).
Let's go over hedge fund activity in other stocks similar to Goldman Sachs BDC, Inc. (NYSE:GSBD). These stocks are CSW Industrials, Inc. (NASDAQ:CSWI), Meridian Bioscience, Inc. (NASDAQ:VIVO), Summit Midstream Partners LP (NYSE:SMLP), and Enviva Partners, LP (NYSE:EVA). This group of stocks' market valuations match GSBD's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CSWI,16,43765,6 VIVO,18,89748,1 SMLP,3,21424,0 EVA,6,39882,1 Average,10.75,48705,2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 10.75 hedge funds with bullish positions and the average amount invested in these stocks was $49 million. That figure was $5 million in GSBD's case. Meridian Bioscience, Inc. (NASDAQ:VIVO) is the most popular stock in this table. On the other hand Summit Midstream Partners LP (NYSE:SMLP) is the least popular one with only 3 bullish hedge fund positions. Goldman Sachs BDC, Inc. (NYSE:GSBD) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately GSBD wasn't nearly as popular as these 15 stock (hedge fund sentiment was quite bearish); GSBD investors were disappointed as the stock returned 13.6% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.
Disclosure: None. This article was originally published at Insider Monkey.