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Hedge Funds Are Cashing Out Of Ares Capital Corporation (ARCC)

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the second quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 5 years and analyze what the smart money thinks of Ares Capital Corporation (NASDAQ:ARCC) based on that data and determine whether they were really smart about the stock.

Ares Capital Corporation (NASDAQ:ARCC) was in 19 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 27. ARCC investors should be aware of a decrease in hedge fund sentiment of late. There were 26 hedge funds in our database with ARCC holdings at the end of March. Our calculations also showed that ARCC isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.

At the moment there are plenty of tools investors put to use to value publicly traded companies. A couple of the most innovative tools are hedge fund and insider trading signals. We have shown that, historically, those who follow the best picks of the elite money managers can beat the broader indices by a healthy margin (see the details here).

Bruce Kovner, Caxton Associates LP

Bruce Kovner of Caxton Associates LP

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 are checking out this junior gold mining stock and we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 10 most profitable companies in the world 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 to get excerpts of these letters in your inbox. Now we’re going to check out the recent hedge fund action surrounding Ares Capital Corporation (NASDAQ:ARCC).

How are hedge funds trading Ares Capital Corporation (NASDAQ:ARCC)?

At Q2’s end, a total of 19 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -27% from the first quarter of 2020. By comparison, 23 hedge funds held shares or bullish call options in ARCC a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

Is ARCC A Good Stock To Buy?

Of the funds tracked by Insider Monkey, Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, holds the biggest position in Ares Capital Corporation (NASDAQ:ARCC). Arrowstreet Capital has a $55.9 million position in the stock, comprising 0.1% of its 13F portfolio. Sitting at the No. 2 spot is D E Shaw, managed by D. E. Shaw, which holds a $26.3 million position; less than 0.1%% of its 13F portfolio is allocated to the stock. Other hedge funds and institutional investors with similar optimism consist of John Overdeck and David Siegel’s Two Sigma Advisors, Israel Englander’s Millennium Management and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position Tegean Capital Management allocated the biggest weight to Ares Capital Corporation (NASDAQ:ARCC), around 8.3% of its 13F portfolio. Lee Capital Management is also relatively very bullish on the stock, earmarking 2.42 percent of its 13F equity portfolio to ARCC.

Judging by the fact that Ares Capital Corporation (NASDAQ:ARCC) has experienced declining sentiment from the smart money, it’s easy to see that there exists a select few funds that slashed their positions entirely by the end of the second quarter. Intriguingly, James Morrow’s Callodine Capital Management cut the biggest position of all the hedgies followed by Insider Monkey, totaling about $7 million in stock. Randall Smith’s fund, Alden Global Capital, also dropped its stock, about $6.2 million worth. These moves are important to note, as total hedge fund interest fell by 7 funds by the end of the second quarter.

Let’s go over hedge fund activity in other stocks similar to Ares Capital Corporation (NASDAQ:ARCC). We will take a look at National Retail Properties, Inc. (NYSE:NNN), Lumentum Holdings Inc (NASDAQ:LITE), Smartsheet Inc. (NYSE:SMAR), SYNNEX Corporation (NYSE:SNX), OGE Energy Corp. (NYSE:OGE), Syneos Health, Inc. (NASDAQ:SYNH), and Athene Holding Ltd. (NYSE:ATH). This group of stocks’ market valuations resemble ARCC’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NNN 17 86331 -2
LITE 42 678388 8
SMAR 47 2024773 6
SNX 24 502344 0
OGE 25 174922 4
SYNH 29 354964 7
ATH 33 765101 1
Average 31 655260 3.4

View table here if you experience formatting issues.

As you can see these stocks had an average of 31 hedge funds with bullish positions and the average amount invested in these stocks was $655 million. That figure was $151 million in ARCC’s case. Smartsheet Inc. (NYSE:SMAR) is the most popular stock in this table. On the other hand National Retail Properties, Inc. (NYSE:NNN) is the least popular one with only 17 bullish hedge fund positions. Ares Capital Corporation (NASDAQ:ARCC) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for ARCC is 22.4. 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. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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 24.8% in 2020 through the end of September and surpassed the market by 19.3 percentage points. Unfortunately ARCC wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); ARCC investors were disappointed as the stock returned -0.7% in the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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