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Were Hedge Funds Right About Souring On Great Elm Capital Corp. (GECC)?

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We are still in an overall bull market and many stocks that smart money investors were piling into surged through November 22nd. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 52% and 49% respectively. Hedge funds' top 3 stock picks returned 39.1% this year and beat the S&P 500 ETFs by nearly 13 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Great Elm Capital Corp. (NASDAQ:GECC).

Great Elm Capital Corp. (NASDAQ:GECC) shareholders have witnessed a decrease in activity from the world's largest hedge funds in recent months. Our calculations also showed that GECC isn't among the 30 most popular stocks among hedge funds.

If you'd ask most stock holders, hedge funds are perceived as underperforming, outdated investment tools of years past. While there are greater than 8000 funds in operation today, We look at the leaders of this club, about 750 funds. These investment experts handle the majority of the hedge fund industry's total capital, and by paying attention to their top picks, Insider Monkey has found numerous investment strategies that have historically outrun Mr. Market. Insider Monkey's flagship short hedge fund strategy outperformed the S&P 500 short ETFs by around 20 percentage points per year since its inception in May 2014. Our portfolio of short stocks lost 27.8% since February 2017 (through November 21st) even though the market was up more than 39% during the same period. We just shared a list of 7 short targets in our latest quarterly update .

[caption id="attachment_338410" align="aligncenter" width="500"]

Jeffrey Bronchick - Cove Street Capital
Jeffrey Bronchick - Cove Street Capital

Jeffrey Bronchick of Cove Street Capital[/caption]

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's take a gander at the key hedge fund action encompassing Great Elm Capital Corp. (NASDAQ:GECC).

What does smart money think about Great Elm Capital Corp. (NASDAQ:GECC)?

Heading into the fourth quarter of 2019, a total of 3 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -25% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in GECC over the last 17 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.

GECC_nov2019
GECC_nov2019

Of the funds tracked by Insider Monkey, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital has the biggest position in Great Elm Capital Corp. (NASDAQ:GECC), worth close to $1.2 million, comprising less than 0.1%% of its total 13F portfolio. The second most bullish fund manager is Two Sigma Advisors, led by John Overdeck and David Siegel, holding a $0.3 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. In terms of the portfolio weights assigned to each position Cove Street Capital allocated the biggest weight to Great Elm Capital Corp. (NASDAQ:GECC), around 0.01% of its portfolio. Arrowstreet Capital is also relatively very bullish on the stock, earmarking 0.0028 percent of its 13F equity portfolio to GECC.

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 GECC as a viable investment and initiated a position in the stock.

Let's now take a look at hedge fund activity in other stocks similar to Great Elm Capital Corp. (NASDAQ:GECC). We will take a look at Sequans Communications SA (NYSE:SQNS), Idera Pharmaceuticals Inc (NASDAQ:IDRA), PolarityTE, Inc. (NASDAQ:PTE), and Servicesource International Inc (NASDAQ:SREV). This group of stocks' market values are similar to GECC's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SQNS,4,14981,0 IDRA,8,18034,0 PTE,11,14461,1 SREV,13,23539,-1 Average,9,17754,0 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 9 hedge funds with bullish positions and the average amount invested in these stocks was $18 million. That figure was $2 million in GECC's case. Servicesource International Inc (NASDAQ:SREV) is the most popular stock in this table. On the other hand Sequans Communications SA (NYSE:SQNS) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Great Elm Capital Corp. (NASDAQ:GECC) is even less popular than SQNS. Hedge funds dodged a bullet by taking a bearish stance towards GECC. Our calculations showed that the top 20 most popular hedge fund stocks returned 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. Unfortunately GECC wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); GECC investors were disappointed as the stock returned -3.6% during the fourth quarter (through 11/22) 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.

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