Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. 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 KAR Auction Services Inc (NYSE:KAR).
Is KAR Auction Services Inc (NYSE:KAR) ready to rally soon? Investors who are in the know are in a pessimistic mood. The number of long hedge fund positions fell by 7 lately. Our calculations also showed that KAR isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 72.9% since March 2017 and outperformed the S&P 500 ETFs by more than 41 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to check out the new hedge fund action regarding KAR Auction Services Inc (NYSE:KAR).
What does smart money think about KAR Auction Services Inc (NYSE:KAR)?
At the end of the fourth quarter, a total of 26 of the hedge funds tracked by Insider Monkey were long this stock, a change of -21% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in KAR over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).
Among these funds, Gates Capital Management held the most valuable stake in KAR Auction Services Inc (NYSE:KAR), which was worth $131.1 million at the end of the third quarter. On the second spot was Cardinal Capital which amassed $88.3 million worth of shares. AQR Capital Management, GLG Partners, and Renaissance Technologies 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 SkyTop Capital Management allocated the biggest weight to KAR Auction Services Inc (NYSE:KAR), around 8.39% of its 13F portfolio. Gates Capital Management is also relatively very bullish on the stock, setting aside 5.75 percent of its 13F equity portfolio to KAR.
Judging by the fact that KAR Auction Services Inc (NYSE:KAR) has faced a decline in interest from the smart money, we can see that there were a few hedge funds who were dropping their positions entirely last quarter. It’s worth mentioning that Ed Bosek’s BeaconLight Capital cut the biggest position of all the hedgies tracked by Insider Monkey, totaling an estimated $8.1 million in stock. Richard Mashaal’s fund, Rima Senvest Management, also cut its stock, about $4.9 million worth. These bearish behaviors are important to note, as total hedge fund interest dropped by 7 funds last 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 NuStar Energy L.P. (NYSE:NS), Acacia Communications, Inc. (NASDAQ:ACIA), Zai Lab Limited (NASDAQ:ZLAB), and Sensient Technologies Corporation (NYSE:SXT). This group of stocks’ market caps resemble KAR’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| NS | 7 | 27233 | 4 |
| ACIA | 31 | 644307 | 4 |
| ZLAB | 26 | 350732 | 5 |
| SXT | 20 | 56525 | 3 |
| Average | 21 | 269699 | 4 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 21 hedge funds with bullish positions and the average amount invested in these stocks was $270 million. That figure was $399 million in KAR’s case. Acacia Communications, Inc. (NASDAQ:ACIA) is the most popular stock in this table. On the other hand NuStar Energy L.P. (NYSE:NS) is the least popular one with only 7 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. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but beat the market by 5.5 percentage points. Unfortunately KAR wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on KAR were disappointed as the stock returned -44.1% during the same time period 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 many of these stocks already outperformed the market so far this year.
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.
