We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Melvin Capital’s recent GameStop losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards KAR Auction Services Inc (NYSE:KAR).
Is KAR Auction Services Inc (NYSE:KAR) going to take off soon? Hedge funds were in a bearish mood. The number of long hedge fund bets were cut by 5 in recent months. KAR Auction Services Inc (NYSE:KAR) was in 22 hedge funds’ portfolios at the end of March. The all time high for this statistic is 44. Our calculations also showed that KAR isn’t among the 30 most popular stocks among hedge funds (click for Q1 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. Hedge funds have more than $3.5 trillion in assets under management, so you can’t expect their entire portfolios to beat the market by large margins. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 115 percentage points since March 2017 (see the details here). So you can still find a lot of gems by following hedge funds’ moves today.
Joshua Friedman of Canyon Capital Advisors
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, Chuck Schumer recently stated that marijuana legalization will be a Senate priority. So, we are checking out this under the radar stock that will benefit from this. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. Now let’s take a look at the latest hedge fund action regarding KAR Auction Services Inc (NYSE:KAR).
Do Hedge Funds Think KAR Is A Good Stock To Buy Now?
Heading into the second quarter of 2021, a total of 22 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -19% from the fourth quarter of 2020. By comparison, 21 hedge funds held shares or bullish call options in KAR a year ago. 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, Cardinal Capital was the largest shareholder of KAR Auction Services Inc (NYSE:KAR), with a stake worth $87.4 million reported as of the end of March. Trailing Cardinal Capital was Royce & Associates, which amassed a stake valued at $15.9 million. Two Sigma Advisors, Canyon Capital Advisors, and GAMCO Investors 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 Cumberland Associates / Springowl Associates allocated the biggest weight to KAR Auction Services Inc (NYSE:KAR), around 3.36% of its 13F portfolio. Cardinal Capital is also relatively very bullish on the stock, setting aside 2.14 percent of its 13F equity portfolio to KAR.
Because KAR Auction Services Inc (NYSE:KAR) has experienced falling interest from the aggregate hedge fund industry, logic holds that there was a specific group of funds that elected to cut their positions entirely by the end of the first quarter. At the top of the heap, David MacKnight’s One Fin Capital Management sold off the largest stake of all the hedgies watched by Insider Monkey, valued at an estimated $11.9 million in stock. Peter Rathjens, Bruce Clarke and John Campbell’s fund, Arrowstreet Capital, also sold off its stock, about $11.7 million worth. These bearish behaviors are important to note, as total hedge fund interest fell by 5 funds by the end of the first quarter.
Let’s now review hedge fund activity in other stocks similar to KAR Auction Services Inc (NYSE:KAR). We will take a look at Gevo, Inc. (NASDAQ:GEVO), The Buckle, Inc. (NYSE:BKE), Perficient, Inc. (NASDAQ:PRFT), Knowles Corp (NYSE:KN), Equinox Gold Corp. (NYSE:EQX), Hostess Brands, Inc. (NASDAQ:TWNK), and Sumo Logic, Inc. (NASDAQ:SUMO). This group of stocks’ market caps are similar to KAR’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| GEVO | 6 | 61483 | -1 |
| BKE | 22 | 77783 | 10 |
| PRFT | 22 | 98024 | 2 |
| KN | 18 | 299542 | -9 |
| EQX | 15 | 55465 | -2 |
| TWNK | 34 | 338263 | 8 |
| SUMO | 14 | 139164 | -2 |
| Average | 18.7 | 152818 | 0.9 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.7 hedge funds with bullish positions and the average amount invested in these stocks was $153 million. That figure was $161 million in KAR’s case. Hostess Brands, Inc. (NASDAQ:TWNK) is the most popular stock in this table. On the other hand Gevo, Inc. (NASDAQ:GEVO) is the least popular one with only 6 bullish hedge fund positions. KAR Auction Services Inc (NYSE:KAR) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for KAR is 43.6. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 23.8% in 2021 through July 16th and beat the market again by 7.7 percentage points. Unfortunately KAR wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on KAR were disappointed as the stock returned 7.8% since the end of March (through 7/16) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.
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Disclosure: None. This article was originally published at Insider Monkey.
