Hedge Funds Cashing Out Of CarMax Inc (KMX)

In this article you are going to find out whether hedge funds think CarMax Inc (NYSE:KMX) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

CarMax Inc (NYSE:KMX) has seen a decrease in hedge fund interest in recent months. Our calculations also showed that KMX isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

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 S&P 500 ETFs by more than 51 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. 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.

Tom Gayner of Markel Gayner Asset Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out trades like this one. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s take a gander at the key hedge fund action encompassing CarMax Inc (NYSE:KMX).

Hedge fund activity in CarMax Inc (NYSE:KMX)

At Q1’s end, a total of 37 of the hedge funds tracked by Insider Monkey were long this stock, a change of -26% from the previous quarter. On the other hand, there were a total of 29 hedge funds with a bullish position in KMX a year ago. With hedgies’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

Among these funds, Akre Capital Management held the most valuable stake in CarMax Inc (NYSE:KMX), which was worth $440.9 million at the end of the third quarter. On the second spot was Markel Gayner Asset Management which amassed $264.5 million worth of shares. Giverny Capital, Southpoint Capital Advisors, and Wallace R. Weitz & Co. 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 18.1% of its 13F portfolio. LFL Advisers is also relatively very bullish on the stock, designating 15.24 percent of its 13F equity portfolio to KMX.

Since CarMax Inc (NYSE:KMX) has faced bearish sentiment from the smart money, we can see that there lies a certain “tier” of funds who were dropping their positions entirely by the end of the third quarter. Intriguingly, Andrew Immerman and Jeremy Schiffman’s Palestra Capital Management dropped the largest investment of the “upper crust” of funds tracked by Insider Monkey, worth about $125.5 million in stock. James Parsons’s fund, Junto Capital Management, also sold off its stock, about $31.2 million worth. These transactions are intriguing to say the least, as total hedge fund interest dropped by 13 funds by the end of the third quarter.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as CarMax Inc (NYSE:KMX) but similarly valued. These stocks are Raymond James Financial, Inc. (NYSE:RJF), The Trade Desk, Inc. (NASDAQ:TTD), Celanese Corporation (NYSE:CE), and Black Knight, Inc. (NYSE:BKI). All of these 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 29.25 hedge funds with bullish positions and the average amount invested in these stocks was $429 million. That figure was $1084 million in KMX’s case. Black Knight, Inc. (NYSE:BKI) is the most popular stock in this table. On the other hand The Trade Desk, Inc. (NASDAQ:TTD) is the least popular one with only 25 bullish hedge fund positions. Compared to these stocks CarMax Inc (NYSE:KMX) is more popular among hedge funds. 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 returned 8.3% in 2020 through the end of May but still managed to beat the market by 13.2 percentage points. Hedge funds were also right about betting on KMX as the stock returned 63.6% so far in Q2 (through the end of May) 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.

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