Is IAA Stock A Buy or Sell?

With the fourth-quarter round of 13F filings behind us it is time to take a look at the stocks in which some of the best money managers in the world preferred to invest or sell heading into the first quarter of 2021. One of these stocks was IAA, Inc. (NYSE:IAA).

Is IAA stock a buy? Hedge funds were in a pessimistic mood. The number of bullish hedge fund positions went down by 1 in recent months. IAA, Inc. (NYSE:IAA) was in 35 hedge funds’ portfolios at the end of December. The all time high for this statistic is 43. Our calculations also showed that IAA isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings). There were 36 hedge funds in our database with IAA holdings at the end of September.

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 124 percentage points since March 2017 (see the details here).

Dan Loeb of Third Point

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, the House passed a landmark bill decriminalizing marijuana. So, we are checking out this under the radar cannabis stock right now. We go through lists like the 10 best battery stocks to buy to identify the next stock with 10x upside potential. 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. With all of this in mind we’re going to view the recent hedge fund action regarding IAA, Inc. (NYSE:IAA).

Do Hedge Funds Think IAA Is A Good Stock To Buy Now?

At the end of December, a total of 35 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -3% from one quarter earlier. By comparison, 37 hedge funds held shares or bullish call options in IAA a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Third Point held the most valuable stake in IAA, Inc. (NYSE:IAA), which was worth $643.3 million at the end of the fourth quarter. On the second spot was Melvin Capital Management which amassed $311.9 million worth of shares. Cadian Capital, Gates Capital Management, and Point State 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 Lionstone Capital Management allocated the biggest weight to IAA, Inc. (NYSE:IAA), around 5.3% of its 13F portfolio. Third Point is also relatively very bullish on the stock, dishing out 4.96 percent of its 13F equity portfolio to IAA.

Because IAA, Inc. (NYSE:IAA) has witnessed declining sentiment from the smart money, it’s easy to see that there were a few funds that decided to sell off their full holdings in the fourth quarter. At the top of the heap, Amy Minella’s Cardinal Capital dumped the largest investment of the 750 funds followed by Insider Monkey, totaling about $18.2 million in stock. Greg Eisner’s fund, Engineers Gate Manager, also dumped its stock, about $1.9 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 1 funds in the fourth quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as IAA, Inc. (NYSE:IAA) but similarly valued. We will take a look at BridgeBio Pharma, Inc. (NASDAQ:BBIO), The Mosaic Company (NYSE:MOS), Aluminum Corp. of China Limited (NYSE:ACH), The New York Times Company (NYSE:NYT), Tapestry, Inc. (NYSE:TPR), Globant SA (NYSE:GLOB), and Alleghany Corporation (NYSE:Y). This group of stocks’ market values match IAA’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.6 hedge funds with bullish positions and the average amount invested in these stocks was $1224 million. That figure was $1547 million in IAA’s case. The New York Times Company (NYSE:NYT) is the most popular stock in this table. On the other hand Aluminum Corp. of China Limited (NYSE:ACH) is the least popular one with only 4 bullish hedge fund positions. IAA, Inc. (NYSE:IAA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for IAA is 62.1. 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 positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 30 most popular stocks among hedge funds returned 81.2% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 26 percentage points. These stocks gained 7.9% in 2021 through April 1st and beat the market again by 0.4 percentage points. Unfortunately IAA wasn’t nearly as popular as these 30 stocks and hedge funds that were betting on IAA were disappointed as the stock returned -13.4% since the end of December (through 4/1) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 30 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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

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