Is Gladstone Capital Corporation (GLAD) Going to Burn These Hedge Funds?

In this article we will check out the progression of hedge fund sentiment towards Gladstone Capital Corporation (NASDAQ:GLAD) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Is Gladstone Capital Corporation (NASDAQ:GLAD) going to take off soon? The best stock pickers are in a bearish mood. The number of bullish hedge fund positions shrunk by 3 recently. Our calculations also showed that GLAD 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). GLAD was in 4 hedge funds’ portfolios at the end of the first quarter of 2020. There were 7 hedge funds in our database with GLAD positions at the end of the previous quarter.

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 44 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.

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, legendary investor Bill Miller told investors to sell 7 extremely popular recession stocks last month. So, we went through his list and recommended another stock with 100% upside potential instead. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s take a look at the latest hedge fund action encompassing Gladstone Capital Corporation (NASDAQ:GLAD).

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

At Q1’s end, a total of 4 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -43% from the fourth quarter of 2019. On the other hand, there were a total of 5 hedge funds with a bullish position in GLAD a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Of the funds tracked by Insider Monkey, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital has the number one position in Gladstone Capital Corporation (NASDAQ:GLAD), worth close to $2.6 million, corresponding to less than 0.1%% of its total 13F portfolio. The second most bullish fund manager is McKinley Capital Management, managed by Robert B. Gillam, which holds a $0.7 million position; 0.1% of its 13F portfolio is allocated to the stock. Other hedge funds and institutional investors with similar optimism encompass Ken Griffin’s Citadel Investment Group, 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 Gladstone Capital Corporation (NASDAQ:GLAD), around 0.06% of its 13F portfolio. Arrowstreet Capital is also relatively very bullish on the stock, setting aside 0.01 percent of its 13F equity portfolio to GLAD.

Since Gladstone Capital Corporation (NASDAQ:GLAD) has experienced declining sentiment from the entirety of the hedge funds we track, we can see that there exists a select few funds that decided to sell off their entire stakes last quarter. At the top of the heap, D. E. Shaw’s D E Shaw said goodbye to the largest stake of the “upper crust” of funds watched by Insider Monkey, comprising an estimated $0.4 million in stock, and Matthew Hulsizer’s PEAK6 Capital Management was right behind this move, as the fund said goodbye to about $0.1 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest was cut by 3 funds last quarter.

Let’s now review hedge fund activity in other stocks similar to Gladstone Capital Corporation (NASDAQ:GLAD). We will take a look at Gogo Inc (NASDAQ:GOGO), Vista Oil & Gas, S.A.B. de C.V. (NYSE:VIST), Cresud Sociedad Anonima Comercial, Inmobiliaria, Financiera y Agropecuaria (NASDAQ:CRESY), and Capital Bancorp, Inc. (NASDAQ:CBNK). This group of stocks’ market valuations are closest to GLAD’s market valuation.

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 $19 million. That figure was $4 million in GLAD’s case. Gogo Inc (NASDAQ:GOGO) is the most popular stock in this table. On the other hand Capital Bancorp, Inc. (NASDAQ:CBNK) is the least popular one with only 2 bullish hedge fund positions. Gladstone Capital Corporation (NASDAQ:GLAD) 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 8.3% in 2020 through the end of May and still beat the market by 13.2 percentage points. A small number of hedge funds were also right about betting on GLAD as the stock returned 27.4% during the second quarter and outperformed the market by an even larger margin.

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