Amid an overall market correction, many stocks that smart money investors were collectively bullish on tanked during the fourth quarter. Among them, Amazon and Netflix ranked among the top 30 picks and both lost around 20%. Facebook, which was the second most popular stock, lost 14% amid uncertainty regarding the interest rates and tech valuations. Nevertheless, our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Is Carvana Co. (NYSE:CVNA) a buy here? The smart money is buying. The number of long hedge fund positions increased by 6 recently. Our calculations also showed that cvna isn’t among the 30 most popular stocks among hedge funds. CVNA was in 33 hedge funds’ portfolios at the end of September. There were 27 hedge funds in our database with CVNA holdings at the end of the previous quarter.
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 market by 18 percentage points since May 2014 through December 3, 2018 (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 our short portfolio.
We’re going to take a look at the key hedge fund action regarding Carvana Co. (NYSE:CVNA).
What have hedge funds been doing with Carvana Co. (NYSE:CVNA)?
At the end of the third quarter, a total of 33 of the hedge funds tracked by Insider Monkey were long this stock, a change of 22% from the second quarter of 2018. By comparison, 12 hedge funds held shares or bullish call options in CVNA heading into this year. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in Carvana Co. (NYSE:CVNA) was held by CAS Investment Partners, which reported holding $121.5 million worth of stock at the end of September. It was followed by Goodnow Investment Group with a $101.8 million position. Other investors bullish on the company included Sylebra Capital Management, 683 Capital Partners, and Melvin Capital Management.
As one would reasonably expect, key hedge funds were leading the bulls’ herd. Nantahala Capital Management, managed by Wilmot B. Harkey and Daniel Mack, assembled the most outsized position in Carvana Co. (NYSE:CVNA). Nantahala Capital Management had $43.5 million invested in the company at the end of the quarter. John Lykouretzos’s Hoplite Capital Management also made a $35.6 million investment in the stock during the quarter. The other funds with brand new CVNA positions are Bruce Garelick’s Garelick Capital Partners, James Crichton’s Hitchwood Capital Management, and Barry Rosenstein’s JANA Partners.
Let’s now review hedge fund activity in other stocks similar to Carvana Co. (NYSE:CVNA). We will take a look at Alnylam Pharmaceuticals, Inc. (NASDAQ:ALNY), Lennox International Inc. (NYSE:LII), The Interpublic Group of Companies, Inc. (NYSE:IPG), and Sun Communities Inc (NYSE:SUI). This group of stocks’ market caps match CVNA’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ALNY | 32 | 727850 | -3 |
| LII | 23 | 210602 | 5 |
| IPG | 16 | 774108 | 0 |
| SUI | 23 | 556542 | 3 |
| Average | 23.5 | 567276 | 1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 23.5 hedge funds with bullish positions and the average amount invested in these stocks was $567 million. That figure was $1.01 billion in CVNA’s case. Alnylam Pharmaceuticals, Inc. (NASDAQ:ALNY) is the most popular stock in this table. On the other hand Interpublic Group of Companies Inc (NYSE:IPG) is the least popular one with only 16 bullish hedge fund positions. Compared to these stocks Carvana Co. (NYSE:CVNA) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers, it may be a good idea to analyze it in detail and potentially include it in your portfolio.
Disclosure: None. This article was originally published at Insider Monkey.
