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Apollo Investment Corp. (AINV): Hedge Funds Are Nibbling

How do you pick the next stock to invest in? One way would be to spend days 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 Apollo Investment Corp. (NASDAQ:AINV) and determine whether hedge funds had an edge regarding this stock.

Is Apollo Investment Corp. (NASDAQ:AINV) the right pick for your portfolio? Hedge funds were taking an optimistic view. The number of bullish hedge fund bets rose by 1 recently. Our calculations also showed that AINV isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

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 S&P 500 ETFs by more than 58 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 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 stocks that are in our short portfolio.

Izzy Englander of MILLENNIUM MANAGEMENT

Israel Englander of Millennium Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s view the latest hedge fund action regarding Apollo Investment Corp. (NASDAQ:AINV).

Hedge fund activity in Apollo Investment Corp. (NASDAQ:AINV)

At the end of the first quarter, a total of 10 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 11% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards AINV over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Apollo Investment Corp. (NASDAQ:AINV) was held by Arrowstreet Capital, which reported holding $14 million worth of stock at the end of September. It was followed by D E Shaw with a $1.2 million position. Other investors bullish on the company included Two Sigma Advisors, McKinley Capital Management, and Millennium Management. In terms of the portfolio weights assigned to each position McKinley Capital Management allocated the biggest weight to Apollo Investment Corp. (NASDAQ:AINV), around 0.07% of its 13F portfolio. Engineers Gate Manager is also relatively very bullish on the stock, setting aside 0.05 percent of its 13F equity portfolio to AINV.

As one would reasonably expect, key money managers have been driving this bullishness. Millennium Management, managed by Israel Englander, created the most outsized position in Apollo Investment Corp. (NASDAQ:AINV). Millennium Management had $0.6 million invested in the company at the end of the quarter. Greg Eisner’s Engineers Gate Manager also made a $0.6 million investment in the stock during the quarter. The other funds with new positions in the stock are Matthew Hulsizer’s PEAK6 Capital Management and Michael Gelband’s ExodusPoint Capital.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Apollo Investment Corp. (NASDAQ:AINV) but similarly valued. We will take a look at Golden Ocean Group Ltd (NASDAQ:GOGL), Global Medical REIT Inc. (NYSE:GMRE), Patterson-UTI Energy, Inc. (NASDAQ:PTEN), and UMH Properties, Inc (NYSE:UMH). This group of stocks’ market values match AINV’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GOGL 8 140504 -1
GMRE 10 13400 1
PTEN 20 70412 -9
UMH 5 4615 1
Average 10.75 57233 -2

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 $57 million. That figure was $19 million in AINV’s case. Patterson-UTI Energy, Inc. (NASDAQ:PTEN) is the most popular stock in this table. On the other hand UMH Properties, Inc (NYSE:UMH) is the least popular one with only 5 bullish hedge fund positions. Apollo Investment Corp. (NASDAQ:AINV) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on AINV as the stock returned 47.6% during the second quarter and outperformed the market by an even larger margin.

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