CarGurus, Inc. (CARG): Hedge Fund Gurus Are Selling

The financial regulations require hedge funds and wealthy investors that exceeded the $100 million equity holdings threshold to file a report that shows their positions at the end of every quarter. Even though it isn’t the intention, these filings to a certain extent level the playing field for ordinary investors. The latest round of 13F filings disclosed the funds’ positions on March 31st, about a week after the S&P 500 Index bottomed. We at Insider Monkey have made an extensive database of more than 821 of those established hedge funds and famous value investors’ filings. In this article, we analyze how these elite funds and prominent investors traded CarGurus, Inc. (NASDAQ:CARG) based on those filings.

CarGurus, Inc. (NASDAQ:CARG) shareholders have witnessed a decrease in activity from the world’s largest hedge funds lately. Our calculations also showed that CARG 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.

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 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 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.

Dmitry Balyasny of Balyasny Asset Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out stocks recommended/scorned by legendary Bill Miller. 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 the 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 glance at the latest hedge fund action surrounding CarGurus, Inc. (NASDAQ:CARG).

How have hedgies been trading CarGurus, Inc. (NASDAQ:CARG)?

At Q1’s end, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -21% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards CARG 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 CarGurus, Inc. (NASDAQ:CARG) was held by HMI Capital, which reported holding $140.2 million worth of stock at the end of September. It was followed by Hound Partners with a $111 million position. Other investors bullish on the company included Matrix Capital Management, Blacksheep Fund Management, and Cat Rock Capital. In terms of the portfolio weights assigned to each position Blacksheep Fund Management allocated the biggest weight to CarGurus, Inc. (NASDAQ:CARG), around 14.7% of its 13F portfolio. Hound Partners is also relatively very bullish on the stock, dishing out 10.35 percent of its 13F equity portfolio to CARG.

Seeing as CarGurus, Inc. (NASDAQ:CARG) has experienced bearish sentiment from the aggregate hedge fund industry, it’s easy to see that there were a few money managers who were dropping their entire stakes in the first quarter. At the top of the heap, Brian Gootzeit and Andrew Frank’s StackLine Partners cut the biggest position of the “upper crust” of funds monitored by Insider Monkey, totaling about $18.9 million in stock, and Andrew Bellas’s General Equity Partners was right behind this move, as the fund cut about $9.8 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest was cut by 7 funds in the first quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as CarGurus, Inc. (NASDAQ:CARG) but similarly valued. These stocks are WNS (Holdings) Limited (NYSE:WNS), Kodiak Sciences Inc (NASDAQ:KOD), Barnes Group Inc. (NYSE:B), and Box, Inc. (NYSE:BOX). All of these stocks’ market caps match CARG’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.5 hedge funds with bullish positions and the average amount invested in these stocks was $364 million. That figure was $485 million in CARG’s case. Box, Inc. (NYSE:BOX) is the most popular stock in this table. On the other hand Barnes Group Inc. (NYSE:B) is the least popular one with only 11 bullish hedge fund positions. CarGurus, Inc. (NASDAQ:CARG) is not the most popular stock in this group but hedge fund interest is still above 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 but still beat the market by 13.2 percentage points. Hedge funds were also right about betting on CARG as the stock returned 37.2% in Q2 (through the end of May) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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