How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding KAR Auction Services Inc (NYSE:KAR) and determine whether hedge funds had an edge regarding this stock.
KAR Auction Services Inc (NYSE:KAR) was in 30 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 44. KAR investors should pay attention to an increase in support from the world’s most elite money managers lately. There were 21 hedge funds in our database with KAR holdings at the end of March. Our calculations also showed that KAR 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.
Jeffrey Gates of Gates Capital
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Now we’re going to take a peek at the key hedge fund action encompassing KAR Auction Services Inc (NYSE:KAR).
What does smart money think about KAR Auction Services Inc (NYSE:KAR)?
Heading into the third quarter of 2020, a total of 30 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 43% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in KAR over the last 20 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).
According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Jeffrey Gates’s Gates Capital Management has the largest position in KAR Auction Services Inc (NYSE:KAR), worth close to $113.8 million, corresponding to 5.7% of its total 13F portfolio. On Gates Capital Management’s heels is Cardinal Capital, led by Amy Minella, holding a $60.6 million position; 2.5% of its 13F portfolio is allocated to the stock. Other hedge funds and institutional investors that are bullish include David Rosen’s Rubric Capital Management, Dmitry Balyasny’s Balyasny Asset Management and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position Gates Capital Management allocated the biggest weight to KAR Auction Services Inc (NYSE:KAR), around 5.69% of its 13F portfolio. Southport Management is also relatively very bullish on the stock, earmarking 3.6 percent of its 13F equity portfolio to KAR.
As aggregate interest increased, key hedge funds were leading the bulls’ herd. Rubric Capital Management, managed by David Rosen, assembled the most outsized position in KAR Auction Services Inc (NYSE:KAR). Rubric Capital Management had $28.9 million invested in the company at the end of the quarter. Dmitry Balyasny’s Balyasny Asset Management also initiated a $17.1 million position during the quarter. The other funds with new positions in the stock are Vikas Lunia’s Lunia Capital, Marc Majzner’s Clearline Capital, and David MacKnight’s One Fin Capital Management.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as KAR Auction Services Inc (NYSE:KAR) but similarly valued. We will take a look at Allegiant Travel Company (NASDAQ:ALGT), The Simply Good Foods Company (NASDAQ:SMPL), SJW Group (NYSE:SJW), Liberty Latin America Ltd. (NASDAQ:LILA), Cavco Industries, Inc. (NASDAQ:CVCO), AMTD International Inc. (NYSE:HKIB), and PRA Group, Inc. (NASDAQ:PRAA). This group of stocks’ market values resemble KAR’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ALGT | 23 | 334831 | 4 |
| SMPL | 26 | 138560 | 7 |
| SJW | 11 | 84916 | 1 |
| LILA | 15 | 102005 | 3 |
| CVCO | 23 | 170774 | 3 |
| HKIB | 1 | 14188 | 0 |
| PRAA | 13 | 70871 | -1 |
| Average | 16 | 130878 | 2.4 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $131 million. That figure was $302 million in KAR’s case. The Simply Good Foods Company (NASDAQ:SMPL) is the most popular stock in this table. On the other hand AMTD International Inc. (NYSE:HKIB) is the least popular one with only 1 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 80.5. 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 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 returned 23.8% in 2020 through September 14th but still managed to beat the market by 17.6 percentage points. Hedge funds were also right about betting on KAR as the stock returned 15.5% since the end of June and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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Disclosure: None. This article was originally published at Insider Monkey.
