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Were Hedge Funds Right About Souring On TCG BDC, Inc. (CGBD)?

Debasis Saha

"The global economic environment is very favorable for investors. Economies are generally strong, but not too strong. Employment levels are among the strongest for many decades. Interest rates are paused at very low levels, and the risk of significant increases in the medium term seems low. Financing for transactions is freely available to good borrowers, but not in major excess. Covenants are lighter than they were five years ago, but the extreme excesses seen in the past do not seem prevalent yet today. Despite this apparent ‘goldilocks’ market environment, we continue to worry about a world where politics are polarized almost everywhere, interest rates are low globally, and equity valuations are at their peak," are the words of Brookfield Asset Management. Brookfield was right about politics as stocks experienced their second worst May since the 1960s due to escalation of trade disputes. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards TCG BDC, Inc. (NASDAQ:CGBD) and see how it was affected.

TCG BDC, Inc. (NASDAQ:CGBD) investors should be aware of a decrease in support from the world's most elite money managers lately. Our calculations also showed that CGBD 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.

5 Most Popular Stocks Among Hedge Funds

Why do we pay any attention at all to hedge fund sentiment? 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

[caption id="attachment_365194" align="alignnone" width="600"] David E. Shaw of D.E. Shaw[/caption]

David E. Shaw of D.E. Shaw

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 as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. Keeping this in mind we're going to take a look at the latest hedge fund action regarding TCG BDC, Inc. (NASDAQ:CGBD).

Hedge fund activity in TCG BDC, Inc. (NASDAQ:CGBD)

Heading into the fourth quarter of 2019, a total of 6 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -25% from the previous quarter. By comparison, 4 hedge funds held shares or bullish call options in CGBD a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is CGBD A Good Stock To Buy?

According to Insider Monkey's hedge fund database, Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, holds the number one position in TCG BDC, Inc. (NASDAQ:CGBD). Arrowstreet Capital has a $16.3 million position in the stock, comprising less than 0.1%% of its 13F portfolio. The second largest stake is held by David E. Shaw of D E Shaw, with a $5.5 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Some other hedge funds and institutional investors that are bullish encompass Robert B. Gillam's McKinley Capital Management, John Overdeck and David Siegel's Two Sigma Advisors and Ken Griffin's Citadel Investment Group. In terms of the portfolio weights assigned to each position McKinley Capital Management allocated the biggest weight to TCG BDC, Inc. (NASDAQ:CGBD), around 0.21% of its 13F portfolio. Arrowstreet Capital is also relatively very bullish on the stock, earmarking 0.04 percent of its 13F equity portfolio to CGBD.

Since TCG BDC, Inc. (NASDAQ:CGBD) has faced bearish sentiment from the smart money, we can see that there were a few fund managers who were dropping their full holdings by the end of the third quarter. At the top of the heap, Israel Englander's Millennium Management dropped the biggest stake of the 750 funds watched by Insider Monkey, totaling an estimated $10.9 million in stock, and Matthew Hulsizer's PEAK6 Capital Management was right behind this move, as the fund dropped about $0.1 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest dropped by 2 funds by the end of the third quarter.

Let's now take a look at hedge fund activity in other stocks similar to TCG BDC, Inc. (NASDAQ:CGBD). These stocks are Diebold Nixdorf Incorporated (NYSE:DBD), 21Vianet Group Inc (NASDAQ:VNET), G1 Therapeutics, Inc. (NASDAQ:GTHX), and German American Bancorp., Inc. (NASDAQ:GABC). All of these stocks' market caps match CGBD's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DBD,17,165479,2 VNET,12,48229,-5 GTHX,14,48901,4 GABC,6,14967,-1 Average,12.25,69394,0 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 12.25 hedge funds with bullish positions and the average amount invested in these stocks was $69 million. That figure was $29 million in CGBD's case. Diebold Nixdorf Incorporated (NYSE:DBD) is the most popular stock in this table. On the other hand German American Bancorp., Inc. (NASDAQ:GABC) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks TCG BDC, Inc. (NASDAQ:CGBD) is even less popular than GABC. Hedge funds dodged a bullet by taking a bearish stance towards CGBD. 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 CGBD wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); CGBD investors were disappointed as the stock returned -5.8% 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.

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