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Did Hedge Funds Drop The Ball On Lithia Motors Inc (LAD) ?

Nina Todic

Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The last 8 months is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by nearly 9 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of Lithia Motors Inc (NYSE:LAD).

Lithia Motors Inc (NYSE:LAD) has seen a decrease in hedge fund interest lately. Our calculations also showed that LAD isn't among the 30 most popular stocks among hedge funds.

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 has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 30.9% through May 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

David Abrams

We're going to take a look at the new hedge fund action surrounding Lithia Motors Inc (NYSE:LAD).

How are hedge funds trading Lithia Motors Inc (NYSE:LAD)?

At the end of the first quarter, a total of 17 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -15% from the fourth quarter of 2018. Below, you can check out the change in hedge fund sentiment towards LAD over the last 15 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with LAD Positions

Among these funds, Abrams Capital Management held the most valuable stake in Lithia Motors Inc (NYSE:LAD), which was worth $213.3 million at the end of the first quarter. On the second spot was Park West Asset Management which amassed $120.2 million worth of shares. Moreover, Cardinal Capital, Lakewood Capital Management, and Tensile Capital were also bullish on Lithia Motors Inc (NYSE:LAD), allocating a large percentage of their portfolios to this stock.

Because Lithia Motors Inc (NYSE:LAD) has experienced bearish sentiment from the aggregate hedge fund industry, we can see that there is a sect of hedge funds that decided to sell off their positions entirely heading into Q3. At the top of the heap, Peter S. Park's Park West Asset Management dropped the biggest investment of the "upper crust" of funds watched by Insider Monkey, comprising about $19.1 million in call options. Alexander Mitchell's fund, Scopus Asset Management, also cut its call options, about $11.5 million worth. These moves are intriguing to say the least, as total hedge fund interest fell by 3 funds heading into Q3.

Let's now review hedge fund activity in other stocks similar to Lithia Motors Inc (NYSE:LAD). We will take a look at GCP Applied Technologies Inc. (NYSE:GCP), Golar LNG Limited (NASDAQ:GLNG), CNX Resources Corporation (NYSE:CNX), and Lexington Realty Trust (NYSE:LXP). This group of stocks' market caps are closest to LAD's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GCP,26,539333,10 GLNG,28,423133,-4 CNX,21,706206,-2 LXP,18,89917,2 Average,23.25,439647,1.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.25 hedge funds with bullish positions and the average amount invested in these stocks was $440 million. That figure was $537 million in LAD's case. Golar LNG Limited (NASDAQ:GLNG) is the most popular stock in this table. On the other hand Lexington Realty Trust (NYSE:LXP) is the least popular one with only 18 bullish hedge fund positions. Compared to these stocks Lithia Motors Inc (NYSE:LAD) is even less popular than LXP. Hedge funds clearly dropped the ball on LAD as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. A small number of hedge funds were also right about betting on LAD as the stock returned 28.3% during the same period and outperformed the market by an even larger margin.

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

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