We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds’ top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 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 Sonic Automotive Inc (NYSE:SAH).
Is Sonic Automotive Inc (NYSE:SAH) the right pick for your portfolio? Prominent investors are becoming more confident. The number of bullish hedge fund bets rose by 1 recently. Our calculations also showed that SAH isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). SAH was in 12 hedge funds’ portfolios at the end of the third quarter of 2019. There were 11 hedge funds in our database with SAH holdings at the end of the previous quarter.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Richard Driehaus of Driehaus Capital
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 based on an under-the-radar fund manager’s investor letter and the stock gained 20 percent. We’re going to check out the latest hedge fund action regarding Sonic Automotive Inc (NYSE:SAH).
How are hedge funds trading Sonic Automotive Inc (NYSE:SAH)?
At Q3’s end, a total of 12 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 9% from one quarter earlier. By comparison, 9 hedge funds held shares or bullish call options in SAH a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of notable hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).
Among these funds, Driehaus Capital held the most valuable stake in Sonic Automotive Inc (NYSE:SAH), which was worth $11.5 million at the end of the third quarter. On the second spot was Millennium Management which amassed $9.8 million worth of shares. Citadel Investment Group, AQR Capital Management, and D E Shaw 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 Driehaus Capital allocated the biggest weight to Sonic Automotive Inc (NYSE:SAH), around 0.37% of its 13F portfolio. PDT Partners is also relatively very bullish on the stock, designating 0.06 percent of its 13F equity portfolio to SAH.
With a general bullishness amongst the heavyweights, key hedge funds have jumped into Sonic Automotive Inc (NYSE:SAH) headfirst. AQR Capital Management, managed by Cliff Asness, assembled the most valuable position in Sonic Automotive Inc (NYSE:SAH). AQR Capital Management had $5.5 million invested in the company at the end of the quarter. Ken Griffin’s Citadel Investment Group also made a $1.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Matthew Hulsizer’s PEAK6 Capital Management, Peter Muller’s PDT Partners, and Matthew Hulsizer’s PEAK6 Capital Management.
Let’s now review hedge fund activity in other stocks similar to Sonic Automotive Inc (NYSE:SAH). These stocks are Qiwi PLC (NASDAQ:QIWI), Eidos Therapeutics, Inc. (NASDAQ:EIDX), IMAX Corporation (NYSE:IMAX), and SciPlay Corporation (NASDAQ:SCPL). This group of stocks’ market caps are similar to SAH’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| QIWI | 13 | 105061 | 0 |
| EIDX | 14 | 185784 | 3 |
| IMAX | 15 | 46829 | 3 |
| SCPL | 16 | 81812 | 0 |
| Average | 14.5 | 104872 | 1.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.5 hedge funds with bullish positions and the average amount invested in these stocks was $105 million. That figure was $40 million in SAH’s case. SciPlay Corporation (NASDAQ:SCPL) is the most popular stock in this table. On the other hand Qiwi PLC (NASDAQ:QIWI) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks Sonic Automotive Inc (NYSE:SAH) is even less popular than QIWI. Hedge funds dodged a bullet by taking a bearish stance towards SAH. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately SAH wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); SAH investors were disappointed as the stock returned 4.3% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.
