Were Hedge Funds Right About IAA, Inc. (IAA)?

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 IAA, Inc. (NYSE:IAA) and determine whether hedge funds had an edge regarding this stock.

IAA, Inc. (NYSE:IAA) shareholders have witnessed an increase in activity from the world’s largest hedge funds lately. Our calculations also showed that IAA isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 58 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 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Thomas Bancroft of Makaira Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. With all of this in mind we’re going to take a look at the key hedge fund action surrounding IAA, Inc. (NYSE:IAA).

What does smart money think about IAA, Inc. (NYSE:IAA)?

At the end of the first quarter, a total of 39 of the hedge funds tracked by Insider Monkey were long this stock, a change of 5% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards IAA over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to Insider Monkey’s hedge fund database, Dan Loeb’s Third Point has the number one position in IAA, Inc. (NYSE:IAA), worth close to $194.7 million, comprising 3.1% of its total 13F portfolio. Sitting at the No. 2 spot is Melvin Capital Management, managed by Gabriel Plotkin, which holds a $146.1 million position; 1.2% of its 13F portfolio is allocated to the stock. Other members of the smart money that are bullish comprise D. E. Shaw’s D E Shaw, Amy Minella’s Cardinal Capital and Jack Woodruff’s Candlestick Capital Management. In terms of the portfolio weights assigned to each position Clearfield Capital allocated the biggest weight to IAA, Inc. (NYSE:IAA), around 12.67% of its 13F portfolio. SkyTop Capital Management is also relatively very bullish on the stock, dishing out 6.37 percent of its 13F equity portfolio to IAA.

Consequently, specific money managers have jumped into IAA, Inc. (NYSE:IAA) headfirst. Clearfield Capital, managed by Philip Hilal, assembled the largest position in IAA, Inc. (NYSE:IAA). Clearfield Capital had $18.7 million invested in the company at the end of the quarter. Thomas Bancroft’s Makaira Partners also initiated a $14.1 million position during the quarter. The other funds with brand new IAA positions are Mark Kingdon’s Kingdon Capital, Zach Petrone’s Highside Global Management, and Renaissance Technologies.

Let’s now review hedge fund activity in other stocks similar to IAA, Inc. (NYSE:IAA). We will take a look at Enphase Energy Inc (NASDAQ:ENPH), CDK Global Inc (NASDAQ:CDK), ITT Inc. (NYSE:ITT), and Lancaster Colony Corporation (NASDAQ:LANC). All of these stocks’ market caps match IAA’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.5 hedge funds with bullish positions and the average amount invested in these stocks was $276 million. That figure was $805 million in IAA’s case. Enphase Energy Inc (NASDAQ:ENPH) is the most popular stock in this table. On the other hand Lancaster Colony Corporation (NASDAQ:LANC) is the least popular one with only 23 bullish hedge fund positions. Compared to these stocks IAA, Inc. (NYSE:IAA) is more popular among hedge funds. 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 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on IAA as the stock returned 28.7% in Q2 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.

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