Gladstone Capital Corporation (GLAD): Hedge Funds In Wait-and-See Mode

As we already know from media reports and hedge fund investor letters, hedge funds delivered their best returns in a decade. Most investors who decided to stick with hedge funds after a rough 2018 recouped their losses by the end of the third quarter. We get to see hedge funds’ thoughts towards the market and individual stocks by aggregating their quarterly portfolio movements and reading their investor letters. In this article, we will particularly take a look at what hedge funds think about Gladstone Capital Corporation (NASDAQ:GLAD).

Gladstone Capital Corporation (NASDAQ:GLAD) shares haven’t seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 5 hedge funds’ portfolios at the end of the third quarter of 2019. 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 Cresud Sociedad Anonima Comercial, Inmobiliaria, Financiera y Agropecuaria (NASDAQ:CRESY), Ardelyx Inc (NASDAQ:ARDX), and Pacific Drilling SA (NYSE:PACD) to gather more data points. Our calculations also showed that GLAD 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.

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 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 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.

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. Now let’s review the fresh hedge fund action regarding Gladstone Capital Corporation (NASDAQ:GLAD).

Hedge fund activity in Gladstone Capital Corporation (NASDAQ:GLAD)

At Q3’s end, a total of 5 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the previous quarter. By comparison, 5 hedge funds held shares or bullish call options in GLAD a year ago. With the smart money’s sentiment swirling, there exists a select group of notable hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

Among these funds, Arrowstreet Capital held the most valuable stake in Gladstone Capital Corporation (NASDAQ:GLAD), which was worth $1.8 million at the end of the third quarter. On the second spot was McKinley Capital Management which amassed $1.3 million worth of shares. Two Sigma Advisors, D E Shaw, and Citadel Investment Group 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 McKinley Capital Management allocated the biggest weight to Gladstone Capital Corporation (NASDAQ:GLAD), around 0.1% of its 13F portfolio. Arrowstreet Capital is also relatively very bullish on the stock, earmarking 0.0041 percent of its 13F equity portfolio to GLAD.

Earlier we told you that the aggregate hedge fund interest in the stock was unchanged and we view this as a negative development. Even though there weren’t any hedge funds dumping their holdings during the third quarter, there weren’t any hedge funds initiating brand new positions. This indicates that hedge funds, at the very best, perceive this stock as dead money and they haven’t identified any viable catalysts that can attract investor attention.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Gladstone Capital Corporation (NASDAQ:GLAD) but similarly valued. These stocks are Cresud Sociedad Anonima Comercial, Inmobiliaria, Financiera y Agropecuaria (NASDAQ:CRESY), Ardelyx Inc (NASDAQ:ARDX), Pacific Drilling SA (NYSE:PACD), and Grupo Supervielle S.A. (NYSE:SUPV). This group of stocks’ market caps are closest to GLAD’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 8.75 hedge funds with bullish positions and the average amount invested in these stocks was $79 million. That figure was $4 million in GLAD’s case. Ardelyx Inc (NASDAQ:ARDX) is the most popular stock in this table. On the other hand Grupo Supervielle S.A. (NYSE:SUPV) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Gladstone Capital Corporation (NASDAQ:GLAD) is even less popular than SUPV. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on GLAD, though not to the same extent, as the stock returned 8.2% during the fourth quarter (through 11/30) and outperformed the market as well.

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