Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts usually don’t make them change their opinion towards a company. This time it may be different. The coronavirus pandemic destroyed the high correlations among major industries and asset classes. We are now in a stock pickers market where fundamentals of a stock have more effect on the price than the overall direction of the market. As a result we observe sudden and large changes in hedge fund positions depending on the news flow. Let’s take a look at the hedge fund sentiment towards KAR Auction Services Inc (NYSE:KAR) to find out whether there were any major changes in hedge funds’ views.
Is KAR a good stock to buy? The smart money was taking a bullish view. The number of long hedge fund positions inched up by 1 lately. KAR Auction Services Inc (NYSE:KAR) was in 23 hedge funds’ portfolios at the end of June. The all time high for this statistic is 44. Our calculations also showed that KAR isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings). There were 22 hedge funds in our database with KAR holdings at the end of March.
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 79 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.
Jeffrey Bronchick of Cove Street Capital
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. With all of this in mind let’s take a look at the key hedge fund action surrounding KAR Auction Services Inc (NYSE:KAR).
Do Hedge Funds Think KAR Is A Good Stock To Buy Now?
At the end of June, a total of 23 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 5% from the first quarter of 2020. By comparison, 30 hedge funds held shares or bullish call options in KAR a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).
The largest stake in KAR Auction Services Inc (NYSE:KAR) was held by Cardinal Capital, which reported holding $109.4 million worth of stock at the end of June. It was followed by Paradice Investment Management with a $71 million position. Other investors bullish on the company included Two Sigma Advisors, Royce & Associates, and Cove Street Capital. In terms of the portfolio weights assigned to each position Cumberland Associates / Springowl Associates allocated the biggest weight to KAR Auction Services Inc (NYSE:KAR), around 3.71% of its 13F portfolio. Paradice Investment Management is also relatively very bullish on the stock, earmarking 3.3 percent of its 13F equity portfolio to KAR.
As one would reasonably expect, specific money managers were leading the bulls’ herd. Holocene Advisors, managed by Brandon Haley, established the most outsized position in KAR Auction Services Inc (NYSE:KAR). Holocene Advisors had $1.5 million invested in the company at the end of the quarter. Michael Gelband’s ExodusPoint Capital also initiated a $1.3 million position during the quarter. The following funds were also among the new KAR investors: Matthew Hulsizer’s PEAK6 Capital Management, Paul Marshall and Ian Wace’s Marshall Wace LLP, and Ran Pang’s Quantamental Technologies.
Let’s also examine hedge fund activity in other stocks similar to KAR Auction Services Inc (NYSE:KAR). These stocks are Victory Capital Holdings, Inc. (NASDAQ:VCTR), Seres Therapeutics Inc (NASDAQ:MCRB), Ligand Pharmaceuticals Inc. (NASDAQ:LGND), Kymera Therapeutics, Inc. (NASDAQ:KYMR), TechTarget Inc (NASDAQ:TTGT), Global Blood Therapeutics Inc (NASDAQ:GBT), and Vector Group Ltd (NYSE:VGR). This group of stocks’ market values are similar to KAR’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| VCTR | 14 | 83647 | 0 |
| MCRB | 16 | 271391 | -3 |
| LGND | 7 | 55674 | -6 |
| KYMR | 21 | 448831 | 5 |
| TTGT | 14 | 118269 | -3 |
| GBT | 16 | 456028 | -3 |
| VGR | 14 | 163192 | 0 |
| Average | 14.6 | 228147 | -1.4 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 14.6 hedge funds with bullish positions and the average amount invested in these stocks was $228 million. That figure was $285 million in KAR’s case. Kymera Therapeutics, Inc. (NASDAQ:KYMR) is the most popular stock in this table. On the other hand Ligand Pharmaceuticals Inc. (NASDAQ:LGND) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks KAR Auction Services Inc (NYSE:KAR) is more popular among hedge funds. Our overall hedge fund sentiment score for KAR is 71.7. 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. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 24% in 2021 through October 22nd and still beat the market by 1.6 percentage points. Unfortunately KAR wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on KAR were disappointed as the stock returned -15.1% since the end of the second quarter (through 10/22) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market since 2019.
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Disclosure: None. This article was originally published at Insider Monkey.
