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Last year we predicted the arrival of the first US recession since 2009 and we told in advance that the market will decline by at least 20% in (Recession is Imminent: We Need A Travel Ban NOW). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Cars.com Inc. (NYSE:CARS).
Is CARS a good stock to buy? Prominent investors were in a bearish mood. The number of bullish hedge fund bets fell by 1 recently. Cars.com Inc. (NYSE:CARS) was in 18 hedge funds' portfolios at the end of March. The all time high for this statistic is 38. Our calculations also showed that CARS isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings).
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 115 percentage points since March 2017 (see the details here). That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Peter Rathjens of Arrowstreet Capital
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 15 best Jim Cramer stocks to identify the next Tesla that will deliver outsized returns. 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. Keeping this in mind let's view the new hedge fund action regarding Cars.com Inc. (NYSE:CARS).
Do Hedge Funds Think CARS Is A Good Stock To Buy Now?
Heading into the second quarter of 2021, a total of 18 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards CARS over the last 23 quarters. With the smart money's sentiment swirling, there exists an "upper tier" of noteworthy hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).
More specifically, Greenvale Capital was the largest shareholder of Cars.com Inc. (NYSE:CARS), with a stake worth $73.8 million reported as of the end of March. Trailing Greenvale Capital was Contrarius Investment Management, which amassed a stake valued at $22.1 million. Arrowstreet Capital, D E Shaw, and Islet 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 Greenvale Capital allocated the biggest weight to Cars.com Inc. (NYSE:CARS), around 8.03% of its 13F portfolio. Rutabaga Capital Management is also relatively very bullish on the stock, setting aside 1.4 percent of its 13F equity portfolio to CARS.
We view hedge fund activity in the stock unfavorable, but in this case there was only a single hedge fund selling its entire position: Blue Grotto Capital. One hedge fund selling its entire position doesn't always imply a bearish intent. Theoretically a hedge fund may decide to sell a promising position in order to invest the proceeds in a more promising idea. However, we don't think this is the case in this case because none of the 750+ hedge funds tracked by Insider Monkey identified CARS as a viable investment and initiated a position in the stock.
Let's check out hedge fund activity in other stocks similar to Cars.com Inc. (NYSE:CARS). These stocks are Shoe Carnival, Inc. (NASDAQ:SCVL), United Fire Group, Inc. (NASDAQ:UFCS), Village Farms International, Inc. (NASDAQ:VFF), Mohawk Group Holdings, Inc. (NASDAQ:MWK), Hanger, Inc. (NYSE:HNGR), Amphastar Pharmaceuticals Inc (NASDAQ:AMPH), and Ruth's Hospitality Group, Inc. (NASDAQ:RUTH). This group of stocks' market caps are closest to CARS's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SCVL,11,72384,0 UFCS,5,22792,-1 VFF,8,35566,2 MWK,12,70338,3 HNGR,11,52894,-4 AMPH,9,10762,0 RUTH,13,64415,2 Average,9.9,47022,0.3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 9.9 hedge funds with bullish positions and the average amount invested in these stocks was $47 million. That figure was $154 million in CARS's case. Ruth's Hospitality Group, Inc. (NASDAQ:RUTH) is the most popular stock in this table. On the other hand United Fire Group, Inc. (NASDAQ:UFCS) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Cars.com Inc. (NYSE:CARS) is more popular among hedge funds. Our overall hedge fund sentiment score for CARS is 68.2. 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 28.5% in 2021 through July 23rd and still beat the market by 10.1 percentage points. Unfortunately CARS wasn't nearly as popular as these 5 stocks and hedge funds that were betting on CARS were disappointed as the stock returned -5.2% since the end of the first quarter (through 7/23) 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.