How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding CarMax Inc (NYSE:KMX) and determine whether hedge funds had an edge regarding this stock.
CarMax Inc (NYSE:KMX) shareholders have witnessed an increase in activity from the world’s largest hedge funds recently. 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. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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 precious metals prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Keeping this in mind we’re going to take a glance at the fresh hedge fund action regarding CarMax Inc (NYSE:KMX).
What does smart money think about CarMax Inc (NYSE:KMX)?
At the end of June, a total of 46 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 24% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards KMX over the last 20 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
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, setting aside 17.97 percent of its 13F equity portfolio to KMX.
As aggregate interest increased, key hedge funds have jumped into CarMax Inc (NYSE:KMX) headfirst. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, initiated the largest 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 initiated a $50.1 million position during the quarter. The following funds were also among the new KMX investors: 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 check out hedge fund activity in other stocks – not necessarily in the same industry as CarMax Inc (NYSE:KMX) but similarly valued. 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 values are similar to KMX’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| BR | 24 | 193920 | -5 |
| SSNC | 65 | 2274258 | 8 |
| RYAAY | 21 | 746925 | -1 |
| DPZ | 47 | 1746559 | 2 |
| VIAC | 45 | 1153093 | -9 |
| GSX | 13 | 103316 | 0 |
| ZS | 35 | 641838 | 8 |
| Average | 35.7 | 979987 | 0.4 |
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. 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 33% in 2020 through the end of August and still beat the market by 23.2 percentage points. Hedge funds were also right about betting on KMX as the stock returned 19.4% since Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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Disclosure: None. This article was originally published at Insider Monkey.
