"Since 2006, value stocks (IVE vs IVW) have underperformed 11 of the 13 calendar years and when they beat growth, it wasn't by much. Cumulatively, through this week, it has been a 122% differential (up 52% for value vs up 174% for growth). This appears to be the longest and most severe drought for value investors since data collection began. It will go our way eventually as there are too many people paying far too much for today's darlings, both public and private. Further, the ten-year yield of 2.5% (pre-tax) isn't attractive nor is real estate. We believe the value part of the global equity market is the only place to earn solid risk adjusted returns and we believe those returns will be higher than normal," said Vilas Fund in its Q1 investor letter. We aren't sure whether value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. That's why we believe it would be worthwhile to take a look at the hedge fund sentiment on Cars.com Inc. (NYSE:CARS) in order to identify whether reputable and successful top money managers continue to believe in its potential.
Cars.com Inc. (NYSE:CARS) investors should be aware of an increase in activity from the world's largest hedge funds recently. CARS was in 29 hedge funds' portfolios at the end of June. There were 27 hedge funds in our database with CARS holdings at the end of the previous quarter. Our calculations also showed that CARS isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's take a look at the fresh hedge fund action surrounding Cars.com Inc. (NYSE:CARS).
Hedge fund activity in Cars.com Inc. (NYSE:CARS)
At Q2's end, a total of 29 of the hedge funds tracked by Insider Monkey were long this stock, a change of 7% from the first quarter of 2019. By comparison, 23 hedge funds held shares or bullish call options in CARS a year ago. With the smart money's sentiment swirling, there exists a select group of noteworthy hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).
More specifically, Starboard Value LP was the largest shareholder of Cars.com Inc. (NYSE:CARS), with a stake worth $125.9 million reported as of the end of March. Trailing Starboard Value LP was Kavi Asset Management, which amassed a stake valued at $38.2 million. Sessa Capital, Steadfast Capital Management, and Greenvale Capital were also very fond of the stock, giving the stock large weights in their portfolios.
As industrywide interest jumped, key hedge funds were leading the bulls' herd. Greenvale Capital, managed by Bruce Emery, created the largest position in Cars.com Inc. (NYSE:CARS). Greenvale Capital had $22.7 million invested in the company at the end of the quarter. Carl Tiedemann and Michael Tiedemann's TIG Advisors also made a $6.5 million investment in the stock during the quarter. The following funds were also among the new CARS investors: David Einhorn's Greenlight Capital, Manoneet Singh's Kavi Asset Management, and Israel Englander's Millennium Management.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Cars.com Inc. (NYSE:CARS) but similarly valued. We will take a look at Central Puerto S.A. (NYSE:CEPU), Air Transport Services Group Inc. (NASDAQ:ATSG), Rush Enterprises, Inc. (NASDAQ:RUSHB), and Gentherm Inc (NASDAQ:THRM). This group of stocks' market valuations are similar to CARS's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CEPU,9,31985,-3 ATSG,15,172396,-3 RUSHB,2,33341,-1 THRM,15,63158,-4 Average,10.25,75220,-2.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 10.25 hedge funds with bullish positions and the average amount invested in these stocks was $75 million. That figure was $324 million in CARS's case. Air Transport Services Group Inc. (NASDAQ:ATSG) is the most popular stock in this table. On the other hand Rush Enterprises, Inc. (NASDAQ:RUSHB) is the least popular one with only 2 bullish hedge fund positions. Compared to these stocks Cars.com Inc. (NYSE:CARS) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately CARS wasn't nearly as popular as these 20 stocks and hedge funds that were betting on CARS were disappointed as the stock returned -54.5% during the third quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market in Q3.
Disclosure: None. This article was originally published at Insider Monkey.