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Is CARG A Good Stock To Buy According To Hedge Funds?

Debasis Saha
·6 min read

In this article you are going to find out whether hedge funds think CarGurus, Inc. (NASDAQ:CARG) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It's not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Is CARG a good stock to buy? CarGurus, Inc. (NASDAQ:CARG) was in 32 hedge funds' portfolios at the end of September. The all time high for this statistic is 33. CARG shareholders have witnessed an increase in activity from the world's largest hedge funds lately. There were 31 hedge funds in our database with CARG positions at the end of the second quarter. Our calculations also showed that CARG isn't among the 30 most popular stocks among hedge funds (click for Q3 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 66 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 13% through November 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Ricky Sandler of Eminence Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, the House passed a landmark bill decriminalizing marijuana. So, we are checking out this under the radar cannabis stock right now. We go through lists like the 15 best blue chip stocks to buy 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. 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 website. Keeping this in mind we're going to take a glance at the fresh hedge fund action regarding CarGurus, Inc. (NASDAQ:CARG).

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

At the end of the third quarter, a total of 32 of the hedge funds tracked by Insider Monkey were long this stock, a change of 3% from the second quarter of 2020. The graph below displays the number of hedge funds with bullish position in CARG over the last 21 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is CARG A Good Stock To Buy?
Is CARG A Good Stock To Buy?

More specifically, HMI Capital was the largest shareholder of CarGurus, Inc. (NASDAQ:CARG), with a stake worth $111.3 million reported as of the end of September. Trailing HMI Capital was Eminence Capital, which amassed a stake valued at $48.9 million. Two Sigma Advisors, Arrowstreet Capital, and StackLine 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 StackLine Partners allocated the biggest weight to CarGurus, Inc. (NASDAQ:CARG), around 7.54% of its 13F portfolio. HMI Capital is also relatively very bullish on the stock, earmarking 4.61 percent of its 13F equity portfolio to CARG.

Now, key hedge funds were leading the bulls' herd. Islet Management, managed by Joseph Samuels, initiated the most valuable position in CarGurus, Inc. (NASDAQ:CARG). Islet Management had $7.6 million invested in the company at the end of the quarter. Israel Englander's Millennium Management also initiated a $4.4 million position during the quarter. The other funds with brand new CARG positions are Joel Greenblatt's Gotham Asset Management, Paul Marshall and Ian Wace's Marshall Wace LLP, and Hoon Kim's Quantinno Capital.

Let's go over hedge fund activity in other stocks similar to CarGurus, Inc. (NASDAQ:CARG). We will take a look at Stepan Company (NYSE:SCL), Echostar Corporation (NASDAQ:SATS), Brookfield Business Partners L.P. (NYSE:BBU), Avient Corporation (NYSE:AVNT), Agios Pharmaceuticals Inc (NASDAQ:AGIO), White Mountains Insurance Group Ltd (NYSE:WTM), and Merit Medical Systems, Inc. (NASDAQ:MMSI). This group of stocks' market values resemble CARG's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SCL,12,46672,-3 SATS,28,346080,-1 BBU,4,4337,1 AVNT,20,221331,-2 AGIO,31,330249,1 WTM,17,115000,6 MMSI,20,289828,4 Average,18.9,193357,0.9 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.9 hedge funds with bullish positions and the average amount invested in these stocks was $193 million. That figure was $328 million in CARG's case. Agios Pharmaceuticals Inc (NASDAQ:AGIO) is the most popular stock in this table. On the other hand Brookfield Business Partners L.P. (NYSE:BBU) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks CarGurus, Inc. (NASDAQ:CARG) is more popular among hedge funds. Our overall hedge fund sentiment score for CARG is 85.1. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks returned 33.3% in 2020 through December 18th but still managed to beat the market by 16.4 percentage points. Hedge funds were also right about betting on CARG as the stock returned 57.6% since the end of September (through 12/18) 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.

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