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Where Do Hedge Funds Stand On Capital Southwest Corporation (CSWC)?

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Abigail Fisher
·6 min read
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With the third-quarter round of 13F filings behind us it is time to take a look at the stocks in which some of the best money managers in the world preferred to invest or sell heading into the fourth quarter. One of these stocks was Capital Southwest Corporation (NASDAQ:CSWC).

Is Capital Southwest Corporation (NASDAQ:CSWC) a buy here? Hedge funds were getting less optimistic. The number of long hedge fund bets fell by 1 lately. Capital Southwest Corporation (NASDAQ:CSWC) was in 7 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistics is 13. Our calculations also showed that CSWC isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 66 percentage points since March 2017 (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 13% through November 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

John Rogers Ariel Investments
John Rogers Ariel Investments

John Rogers of Ariel Investments

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. Keeping this in mind let's take a look at the latest hedge fund action regarding Capital Southwest Corporation (NASDAQ:CSWC).

How are hedge funds trading Capital Southwest Corporation (NASDAQ:CSWC)?

At third quarter's end, a total of 7 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from the second quarter of 2020. On the other hand, there were a total of 11 hedge funds with a bullish position in CSWC a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

More specifically, Ariel Investments was the largest shareholder of Capital Southwest Corporation (NASDAQ:CSWC), with a stake worth $2.2 million reported as of the end of September. Trailing Ariel Investments was Moerus Capital Management, which amassed a stake valued at $2 million. Arrowstreet Capital, Two Sigma Advisors, and Millennium Management were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Moerus Capital Management allocated the biggest weight to Capital Southwest Corporation (NASDAQ:CSWC), around 0.96% of its 13F portfolio. Ariel Investments is also relatively very bullish on the stock, designating 0.03 percent of its 13F equity portfolio to CSWC.

We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: ExodusPoint Capital. 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 CSWC as a viable investment and initiated a position in the stock.

Let's go over hedge fund activity in other stocks similar to Capital Southwest Corporation (NASDAQ:CSWC). These stocks are Taseko Mines Limited (NYSE:TGB), United Insurance Holdings Corp. (NASDAQ:UIHC), West Bancorporation, Inc. (NASDAQ:WTBA), G. Willi-Food International Limited (NASDAQ:WILC), Genius Brands International, Inc. (NASDAQ:GNUS), Cabaletta Bio, Inc. (NASDAQ:CABA), and NantHealth, Inc. (NASDAQ:NH). All of these stocks' market caps match CSWC's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TGB,5,7070,2 UIHC,9,7237,0 WTBA,3,6805,0 WILC,3,29801,0 GNUS,2,2021,-2 CABA,8,93137,-1 NH,5,3004,2 Average,5,21296,0.1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 5 hedge funds with bullish positions and the average amount invested in these stocks was $21 million. That figure was $8 million in CSWC's case. United Insurance Holdings Corp. (NASDAQ:UIHC) is the most popular stock in this table. On the other hand Genius Brands International, Inc. (NASDAQ:GNUS) is the least popular one with only 2 bullish hedge fund positions. Capital Southwest Corporation (NASDAQ:CSWC) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CSWC is 55.9. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 31.6% in 2020 through December 2nd and still beat the market by 16 percentage points. Hedge funds were also right about betting on CSWC as the stock returned 23.5% since the end of Q3 (through 12/2) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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Disclosure: None. This article was originally published at Insider Monkey.

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