Were Hedge Funds Right About Dumping Golub Capital BDC Inc (GBDC)?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Golub Capital BDC Inc (NASDAQ:GBDC) and determine whether the smart money was really smart about this stock.

Is Golub Capital BDC Inc (NASDAQ:GBDC) a splendid stock to buy now? Money managers were reducing their bets on the stock. The number of long hedge fund bets went down by 3 recently. Our calculations also showed that GBDC 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). GBDC was in 13 hedge funds’ portfolios at the end of the first quarter of 2020. There were 16 hedge funds in our database with GBDC holdings at the end of the previous quarter.

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 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

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, we take a look at lists like the top 20 agriculture producing countries to identify emerging companies that are likely to deliver 1000% gains in the coming years. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. 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. Keeping this in mind let’s check out the fresh hedge fund action regarding Golub Capital BDC Inc (NASDAQ:GBDC).

How are hedge funds trading Golub Capital BDC Inc (NASDAQ:GBDC)?

Heading into the second quarter of 2020, a total of 13 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -19% from the previous quarter. By comparison, 8 hedge funds held shares or bullish call options in GBDC a year ago. With hedgies’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were boosting their stakes substantially (or already accumulated large positions).

Is GBDC A Good Stock To Buy?

More specifically, Clough Capital Partners was the largest shareholder of Golub Capital BDC Inc (NASDAQ:GBDC), with a stake worth $18.6 million reported as of the end of September. Trailing Clough Capital Partners was D E Shaw, which amassed a stake valued at $9.2 million. Millennium Management, McKinley Capital Management, 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 Clough Capital Partners allocated the biggest weight to Golub Capital BDC Inc (NASDAQ:GBDC), around 1.85% of its 13F portfolio. Ayrshire Capital Management is also relatively very bullish on the stock, setting aside 0.42 percent of its 13F equity portfolio to GBDC.

Seeing as Golub Capital BDC Inc (NASDAQ:GBDC) has experienced declining sentiment from the aggregate hedge fund industry, it’s safe to say that there exists a select few funds who sold off their entire stakes in the first quarter. Interestingly, Ron Mass’s Almitas Capital dropped the biggest stake of the “upper crust” of funds monitored by Insider Monkey, totaling close to $1 million in stock, and Karim Abbadi and Edward McBride’s Centiva Capital was right behind this move, as the fund cut about $0.8 million worth. These transactions are important to note, as aggregate hedge fund interest fell by 3 funds in the first quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Golub Capital BDC Inc (NASDAQ:GBDC) but similarly valued. These stocks are Genworth Financial Inc (NYSE:GNW), Option Care Health, Inc. (NASDAQ:OPCH), Spectrum Brands Holdings, Inc. (NYSE:SPB), and LCI Industries (NYSE:LCII). This group of stocks’ market caps are similar to GBDC’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GNW 32 258511 0
OPCH 7 12260 -7
SPB 24 207647 -21
LCII 15 77500 -2
Average 19.5 138980 -7.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.5 hedge funds with bullish positions and the average amount invested in these stocks was $139 million. That figure was $53 million in GBDC’s case. Genworth Financial Inc (NYSE:GNW) is the most popular stock in this table. On the other hand Option Care Health, Inc. (NASDAQ:OPCH) is the least popular one with only 7 bullish hedge fund positions. Golub Capital BDC Inc (NASDAQ:GBDC) is not the least popular stock in this group but hedge fund interest is still below average. 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 13.3% in 2020 through June 25th and surpassed the market by 16.8 percentage points. Unfortunately GBDC wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); GBDC investors were disappointed as the stock returned -4.6% during the second 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.