Hedge Fund Darlings vs. CarMax Inc (KMX) In 2019

We are still in an overall bull market and many stocks that smart money investors were piling into surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 57% each. Hedge funds’ top 3 stock picks returned 44.6% this year and beat the S&P 500 ETFs by nearly 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like CarMax Inc (NYSE:KMX).

CarMax Inc (NYSE:KMX) has seen an increase in enthusiasm from smart money of late. Our calculations also showed that KMX isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

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’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Tom Gayner of Markel Gayner Asset Management

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. With all of this in mind let’s take a peek at the key hedge fund action encompassing CarMax Inc (NYSE:KMX).

How are hedge funds trading CarMax Inc (NYSE:KMX)?

At the end of the third quarter, a total of 41 of the hedge funds tracked by Insider Monkey were long this stock, a change of 5% from the second quarter of 2019. On the other hand, there were a total of 31 hedge funds with a bullish position in KMX a year ago. With the smart money’s sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Akre Capital Management, managed by Charles Akre, holds the number one position in CarMax Inc (NYSE:KMX). Akre Capital Management has a $553.1 million position in the stock, comprising 5.5% of its 13F portfolio. The second most bullish fund manager is Markel Gayner Asset Management, led by Tom Gayner, holding a $432.4 million position; 6.5% of its 13F portfolio is allocated to the stock. Remaining peers with similar optimism encompass Andrew Immerman and Jeremy Schiffman’s Palestra Capital Management, Francois Rochon’s Giverny Capital and David E. Shaw’s D E Shaw. In terms of the portfolio weights assigned to each position Lansing Management allocated the biggest weight to CarMax Inc (NYSE:KMX), around 16.34% of its 13F portfolio. Giverny Capital is also relatively very bullish on the stock, designating 10.73 percent of its 13F equity portfolio to KMX.

Consequently, specific money managers were breaking ground themselves. Renaissance Technologies, assembled the biggest position in CarMax Inc (NYSE:KMX). Renaissance Technologies had $40.9 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also made a $25.8 million investment in the stock during the quarter. The other funds with new positions in the stock are Peter Muller’s PDT Partners, Robert Pohly’s Samlyn Capital, and David E. Shaw’s D E Shaw.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as CarMax Inc (NYSE:KMX) but similarly valued. These stocks are Brookfield Infrastructure Partners L.P. (NYSE:BIP), Genuine Parts Company (NYSE:GPC), Franklin Resources, Inc. (NYSE:BEN), and Darden Restaurants, Inc. (NYSE:DRI). This group of stocks’ market caps match KMX’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.5 hedge funds with bullish positions and the average amount invested in these stocks was $414 million. That figure was $1887 million in KMX’s case. Franklin Resources, Inc. (NYSE:BEN) is the most popular stock in this table. On the other hand Brookfield Infrastructure Partners L.P. (NYSE:BIP) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks CarMax Inc (NYSE:KMX) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on KMX as the stock returned 42.2% so far in 2019 (through 12/23) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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