It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren’t usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index’s returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you’d fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 10 percentage points so far in 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That’s why we are going to go over recent hedge fund activity in Cars.com Inc. (NYSE:CARS).
Cars.com Inc. (NYSE:CARS) investors should pay attention to an increase in activity from the world’s largest hedge funds recently. CARS was in 31 hedge funds’ portfolios at the end of September. There were 29 hedge funds in our database with CARS positions at the end of the previous quarter. Our calculations also showed that CARS isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 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. Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Seth Klarman of Baupost Group
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 as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. Now we’re going to go over the recent hedge fund action surrounding Cars.com Inc. (NYSE:CARS).
Hedge fund activity in Cars.com Inc. (NYSE:CARS)
Heading into the fourth quarter of 2019, a total of 31 of the hedge funds tracked by Insider Monkey were long this stock, a change of 7% from the second quarter of 2019. By comparison, 30 hedge funds held shares or bullish call options in CARS a year ago. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Baupost Group was the largest shareholder of Cars.com Inc. (NYSE:CARS), with a stake worth $26.9 million reported as of the end of September. Trailing Baupost Group was Sessa Capital, which amassed a stake valued at $24.1 million. Steadfast Capital Management, AQR Capital Management, and Millennium Management 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 Clearline Capital allocated the biggest weight to Cars.com Inc. (NYSE:CARS), around 3.45% of its 13F portfolio. Greenvale Capital is also relatively very bullish on the stock, earmarking 3.23 percent of its 13F equity portfolio to CARS.
As aggregate interest increased, key money managers were breaking ground themselves. Baupost Group, managed by Seth Klarman, assembled the biggest position in Cars.com Inc. (NYSE:CARS). Baupost Group had $26.9 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also made a $9.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Andrew Kurita’s Kettle Hill Capital Management, Paul Marshall and Ian Wace’s Marshall Wace, and Donald Sussman’s Paloma Partners.
Let’s now take a look at hedge fund activity in other stocks similar to Cars.com Inc. (NYSE:CARS). We will take a look at SMART Global Holdings, Inc. (NASDAQ:SGH), Fiverr International Ltd. (NYSE:FVRR), MuniVest Fund, Inc. (NYSE:MVF), and Forrester Research, Inc. (NASDAQ:FORR). This group of stocks’ market values match CARS’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| SGH | 17 | 285893 | 7 |
| FVRR | 5 | 9126 | -4 |
| MVF | 1 | 586 | 0 |
| FORR | 13 | 46630 | 3 |
| Average | 9 | 85559 | 1.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 9 hedge funds with bullish positions and the average amount invested in these stocks was $86 million. That figure was $172 million in CARS’s case. SMART Global Holdings, Inc. (NASDAQ:SGH) is the most popular stock in this table. On the other hand MuniVest Fund, Inc. (NYSE:MVF) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks Cars.com Inc. (NYSE:CARS) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately CARS wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on CARS were disappointed as the stock returned -43% so far in 2019 (through 12/23) and trailed 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 65 percent of these stocks already outperformed the market in 2019.
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.
