Is Credit Acceptance Corp. (CACC) Going to Burn These Hedge Funds?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Credit Acceptance Corp. (NASDAQ:CACC) at the end of the second quarter and determine whether the smart money was really smart about this stock.

Credit Acceptance Corp. (NASDAQ:CACC) was in 23 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 31. CACC has seen an increase in enthusiasm from smart money of late. There were 22 hedge funds in our database with CACC positions at the end of the first quarter. Our calculations also showed that CACC isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.

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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

William Von Mueffling of Cantillon Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers after its stock price crashed. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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 website to get excerpts of these letters in your inbox. With all of this in mind we’re going to take a look at the fresh hedge fund action regarding Credit Acceptance Corp. (NASDAQ:CACC).

Hedge fund activity in Credit Acceptance Corp. (NASDAQ:CACC)

Heading into the third quarter of 2020, a total of 23 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 5% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in CACC over the last 20 quarters. With hedgies’ capital changing hands, there exists a few notable hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

Among these funds, Gobi Capital held the most valuable stake in Credit Acceptance Corp. (NASDAQ:CACC), which was worth $239 million at the end of the third quarter. On the second spot was BloombergSen which amassed $201.3 million worth of shares. Cantillon Capital Management, Abrams Bison Investments, and Immersion Capital 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 Billings Capital Management allocated the biggest weight to Credit Acceptance Corp. (NASDAQ:CACC), around 24.09% of its 13F portfolio. Gobi Capital is also relatively very bullish on the stock, earmarking 17.51 percent of its 13F equity portfolio to CACC.

With a general bullishness amongst the heavyweights, some big names have jumped into Credit Acceptance Corp. (NASDAQ:CACC) headfirst. LMR Partners, managed by Ben Levine, Andrew Manuel and Stefan Renold, assembled the most outsized position in Credit Acceptance Corp. (NASDAQ:CACC). LMR Partners had $51.3 million invested in the company at the end of the quarter. Jonathan Auerbach’s Hound Partners also made a $13.8 million investment in the stock during the quarter. The following funds were also among the new CACC investors: Francois Rochon’s Giverny Capital, Karim Abbadi and Edward McBride’s Centiva Capital, and Brandon Haley’s Holocene Advisors.

Let’s now take a look at hedge fund activity in other stocks similar to Credit Acceptance Corp. (NASDAQ:CACC). These stocks are Livongo Health, Inc. (NASDAQ:LVGO), Formula One Group (NASDAQ:FWONK), WestRock Company (NYSE:WRK), BorgWarner Inc. (NYSE:BWA), Vail Resorts, Inc. (NYSE:MTN), Hill-Rom Holdings, Inc. (NYSE:HRC), and Vornado Realty Trust (NYSE:VNO). This group of stocks’ market valuations match CACC’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.7 hedge funds with bullish positions and the average amount invested in these stocks was $690 million. That figure was $986 million in CACC’s case. Formula One Group (NASDAQ:FWONK) is the most popular stock in this table. On the other hand Vornado Realty Trust (NYSE:VNO) is the least popular one with only 17 bullish hedge fund positions. Credit Acceptance Corp. (NASDAQ:CACC) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for CACC is 37.6. 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 negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. 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 gained 24.8% in 2020 through the end of September and surpassed the market by 19.3 percentage points. Unfortunately CACC wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); CACC investors were disappointed as the stock returned -19.2% in the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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