The market has been volatile in the last few months as the Federal Reserve finalized its rate cuts and uncertainty looms over trade negotiations with China. Small cap stocks have been hit hard as a result, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 10 percentage points over the last 12 months. SEC filings and hedge fund investor letters indicate that the smart money seems to be paring back their overall long exposure since summer months, though some funds increased their exposure dramatically at the end of Q3 and the beginning of Q4. In this article, we analyze what the smart money thinks of Lithia Motors Inc (NYSE:LAD) and find out how it is affected by hedge funds’ moves.
Is Lithia Motors Inc (NYSE:LAD) a healthy stock for your portfolio? The smart money is in an optimistic mood. The number of bullish hedge fund positions inched up by 3 in recent months. Our calculations also showed that LAD isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). LAD was in 24 hedge funds’ portfolios at the end of the third quarter of 2019. There were 21 hedge funds in our database with LAD positions at the end of the previous quarter.
Video: Click the image to 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 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.
David Abrams of Abrams Capital Management
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s review the fresh hedge fund action encompassing Lithia Motors Inc (NYSE:LAD).
How are hedge funds trading Lithia Motors Inc (NYSE:LAD)?
Heading into the fourth quarter of 2019, a total of 24 of the hedge funds tracked by Insider Monkey were long this stock, a change of 14% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards LAD over the last 17 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).
More specifically, Abrams Capital Management was the largest shareholder of Lithia Motors Inc (NYSE:LAD), with a stake worth $304.5 million reported as of the end of September. Trailing Abrams Capital Management was Cardinal Capital, which amassed a stake valued at $100.3 million. Arrowstreet Capital, Capital Growth Management, and GLG Partners 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 Abrams Capital Management allocated the biggest weight to Lithia Motors Inc (NYSE:LAD), around 8.52% of its 13F portfolio. Cardinal Capital is also relatively very bullish on the stock, designating 3.31 percent of its 13F equity portfolio to LAD.
Consequently, key money managers have been driving this bullishness. Capital Growth Management, managed by Ken Heebner, assembled the most valuable position in Lithia Motors Inc (NYSE:LAD). Capital Growth Management had $40.1 million invested in the company at the end of the quarter. Renaissance Technologies also initiated a $3.1 million position during the quarter. The other funds with brand new LAD positions are Charles Davidson and Joseph Jacobs’s Wexford Capital, Cliff Asness’s AQR Capital Management, and Dmitry Balyasny’s Balyasny Asset Management.
Let’s check out hedge fund activity in other stocks similar to Lithia Motors Inc (NYSE:LAD). We will take a look at Grocery Outlet Holding Corp. (NASDAQ:GO), Mirati Therapeutics, Inc. (NASDAQ:MRTX), Atlantic Union Bankshares Corporation (NASDAQ:AUB), and NuStar Energy L.P. (NYSE:NS). This group of stocks’ market caps resemble LAD’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| GO | 15 | 63095 | -6 |
| MRTX | 33 | 1154565 | 6 |
| AUB | 3 | 19925 | 0 |
| NS | 2 | 1883 | 0 |
| Average | 13.25 | 309867 | 0 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.25 hedge funds with bullish positions and the average amount invested in these stocks was $310 million. That figure was $629 million in LAD’s case. Mirati Therapeutics, Inc. (NASDAQ:MRTX) is the most popular stock in this table. On the other hand NuStar Energy L.P. (NYSE:NS) is the least popular one with only 2 bullish hedge fund positions. Lithia Motors Inc (NYSE:LAD) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on LAD as the stock returned 21.5% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.
