Was The Smart Money Right About Lithia Motors Inc (LAD)?

In this article we are going to use hedge fund sentiment as a tool and determine whether Lithia Motors Inc (NYSE:LAD) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.

Lithia Motors Inc (NYSE:LAD) has experienced an increase in enthusiasm from smart money lately. Lithia Motors Inc (NYSE:LAD) was in 63 hedge funds’ portfolios at the end of June. The all time high for this statistic was previously 49. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that LAD isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).

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.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, the demand for helium is soaring and there is a helium supply shortage, so we are checking out stock pitches like this emerging helium 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 new hedge fund action encompassing Lithia Motors Inc (NYSE:LAD).

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

At second quarter’s end, a total of 63 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 58% from one quarter earlier. By comparison, 31 hedge funds held shares or bullish call options in LAD a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

Among these funds, Abrams Capital Management held the most valuable stake in Lithia Motors Inc (NYSE:LAD), which was worth $807.9 million at the end of the second quarter. On the second spot was Viking Global which amassed $277.5 million worth of shares. Southpoint Capital Advisors, Lyrical Asset Management, and Park West Asset Management 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 17.96% of its 13F portfolio. Tensile Capital is also relatively very bullish on the stock, designating 12.83 percent of its 13F equity portfolio to LAD.

Consequently, some big names were leading the bulls’ herd. D E Shaw, managed by D. E. Shaw, created the largest position in Lithia Motors Inc (NYSE:LAD). D E Shaw had $55.3 million invested in the company at the end of the quarter. Leon Cooperman’s Omega Advisors also made a $47.3 million investment in the stock during the quarter. The following funds were also among the new LAD investors: Jeffrey Jacobowitz’s Simcoe Capital Management, Ryan Tolkin (CIO)’s Schonfeld Strategic Advisors, and Jeffrey Altman’s Owl Creek Asset Management.

Let’s go over hedge fund activity in other stocks similar to Lithia Motors Inc (NYSE:LAD). We will take a look at Henry Schein, Inc. (NASDAQ:HSIC), GFL Environmental Inc. (NYSE:GFL), Paylocity Holding Corp (NASDAQ:PCTY), Ares Management Corp (NYSE:ARES), Kirkland Lake Gold Ltd. (NYSE:KL), Opendoor Technologies Inc. (NASDAQ:OPEN), and Owens Corning (NYSE:OC). All of these stocks’ market caps are closest to LAD’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.4 hedge funds with bullish positions and the average amount invested in these stocks was $690 million. That figure was $2924 million in LAD’s case. Henry Schein, Inc. (NASDAQ:HSIC) is the most popular stock in this table. On the other hand Paylocity Holding Corp (NASDAQ:PCTY) is the least popular one with only 19 bullish hedge fund positions. Compared to these stocks Lithia Motors Inc (NYSE:LAD) is more popular among hedge funds. Our overall hedge fund sentiment score for LAD is 90. 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 26.3% in 2021 through October 29th and still beat the market by 2.3 percentage points. Unfortunately LAD wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on LAD were disappointed as the stock returned -7% since the end of the second quarter (through 10/29) 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.

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