We are still in an overall bull market and many stocks that smart money investors were piling into surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained more than 57% each. Hedge funds' top 3 stock picks returned 44.6% this year and beat the S&P 500 ETFs by almost 14 percentage points. That's a big deal. This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
KAR Auction Services Inc (NYSE:KAR) investors should be aware of a decrease in enthusiasm from smart money recently. KAR was in 30 hedge funds' portfolios at the end of September. There were 32 hedge funds in our database with KAR holdings at the end of the previous quarter. Our calculations also showed that KAR isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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 stocks that are in our short portfolio.
[caption id="attachment_26388" align="alignnone" width="600"] Lee Ainslie of Maverick Capital[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. With all of this in mind let's take a look at the recent hedge fund action surrounding KAR Auction Services Inc (NYSE:KAR).
How are hedge funds trading KAR Auction Services Inc (NYSE:KAR)?
At the end of the third quarter, a total of 30 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -6% from one quarter earlier. On the other hand, there were a total of 28 hedge funds with a bullish position in KAR a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Maverick Capital was the largest shareholder of KAR Auction Services Inc (NYSE:KAR), with a stake worth $139.5 million reported as of the end of September. Trailing Maverick Capital was Gates Capital Management, which amassed a stake valued at $117.1 million. Cardinal Capital, AQR Capital Management, and Renaissance Technologies 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 SkyTop Capital Management allocated the biggest weight to KAR Auction Services Inc (NYSE:KAR), around 10.78% of its 13F portfolio. AWH Capital is also relatively very bullish on the stock, earmarking 5.22 percent of its 13F equity portfolio to KAR.
Because KAR Auction Services Inc (NYSE:KAR) has witnessed falling interest from the smart money, we can see that there lies a certain "tier" of fund managers that decided to sell off their entire stakes heading into Q4. Interestingly, Matt Sirovich and Jeremy Mindich's Scopia Capital dropped the biggest investment of all the hedgies watched by Insider Monkey, comprising an estimated $64.1 million in stock, and John Brennan's Sirios Capital Management was right behind this move, as the fund dropped about $23.3 million worth. These moves are interesting, as aggregate hedge fund interest fell by 2 funds heading into Q4.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as KAR Auction Services Inc (NYSE:KAR) but similarly valued. These stocks are B2Gold Corp (NYSE:BTG), United States Cellular Corporation (NYSE:USM), PBF Energy Inc (NYSE:PBF), and Five9 Inc (NASDAQ:FIVN). This group of stocks' market values resemble KAR's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BTG,14,186035,-3 USM,18,139096,3 PBF,28,245436,2 FIVN,31,579426,8 Average,22.75,287498,2.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 22.75 hedge funds with bullish positions and the average amount invested in these stocks was $287 million. That figure was $575 million in KAR's case. Five9 Inc (NASDAQ:FIVN) is the most popular stock in this table. On the other hand B2Gold Corp (NYSE:BTG) is the least popular one with only 14 bullish hedge fund positions. KAR Auction Services Inc (NYSE:KAR) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately KAR wasn't nearly as popular as these 20 stocks and hedge funds that were betting on KAR were disappointed as the stock returned 26% in 2019 (through December 23rd) 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 so far this year. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.