CarMax Inc (KMX): Are Hedge Funds Right About This Stock?

Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 823 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about CarMax Inc (NYSE:KMX).

CarMax Inc (NYSE:KMX) investors should pay attention to an increase in hedge fund interest lately. CarMax Inc (NYSE:KMX) was in 46 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 50. Our calculations also showed that KMX 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.

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.

Ryan Frick of Dorsal Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. 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. With all of this in mind we’re going to check out the new hedge fund action regarding CarMax Inc (NYSE:KMX).

Hedge fund activity in CarMax Inc (NYSE:KMX)

At Q2’s end, a total of 46 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 24% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards KMX over the last 20 quarters. With hedgies’ sentiment swirling, there exists a select group of noteworthy hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

More specifically, Akre Capital Management was the largest shareholder of CarMax Inc (NYSE:KMX), with a stake worth $730.2 million reported as of the end of September. Trailing Akre Capital Management was Arrowstreet Capital, which amassed a stake valued at $102.4 million. Giverny Capital, Wallace R. Weitz & Co., and Candlestick Capital Management 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 Silver Heights Capital Management allocated the biggest weight to CarMax Inc (NYSE:KMX), around 19.93% of its 13F portfolio. LFL Advisers is also relatively very bullish on the stock, earmarking 17.97 percent of its 13F equity portfolio to KMX.

As one would reasonably expect, key hedge funds have been driving this bullishness. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, created the most outsized position in CarMax Inc (NYSE:KMX). Arrowstreet Capital had $102.4 million invested in the company at the end of the quarter. Jack Woodruff’s Candlestick Capital Management also made a $50.1 million investment in the stock during the quarter. The other funds with new positions in the stock are Josh Donfeld and David Rogers’s Castle Hook Partners, Ryan Frick and Oliver Evans’s Dorsal Capital Management, and Kamyar Khajavi’s MIK Capital.

Let’s go over hedge fund activity in other stocks similar to CarMax Inc (NYSE:KMX). We will take a look at Broadridge Financial Solutions, Inc. (NYSE:BR), SS&C Technologies Holdings, Inc. (NASDAQ:SSNC), Ryanair Holdings plc (NASDAQ:RYAAY), Domino’s Pizza, Inc. (NYSE:DPZ), ViacomCBS Inc. (NASDAQ:VIAC), GSX Techedu Inc. (NYSE:GSX), and Zscaler, Inc. (NASDAQ:ZS). This group of stocks’ market valuations match KMX’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 35.7 hedge funds with bullish positions and the average amount invested in these stocks was $980 million. That figure was $1420 million in KMX’s case. SS&C Technologies Holdings, Inc. (NASDAQ:SSNC) is the most popular stock in this table. On the other hand GSX Techedu Inc. (NYSE:GSX) is the least popular one with only 13 bullish hedge fund positions. CarMax Inc (NYSE:KMX) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for KMX is 69.3. 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 positive signal but 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 30% in 2020 through October 23rd and beat the market by 21 percentage points. Unfortunately KMX wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on KMX were disappointed as the stock returned 1.6% since the end of June (through 10/23) 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 many of these stocks already outperformed the market so far this year.

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