Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before the Q4 market crash that the stock market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the fourth quarter, many investors lost money due to unpredictable events such as the sudden increase in long-term interest rates and unintended consequences of the trade war with China. Nevertheless, many of the stocks that tanked in the fourth quarter still sport strong fundamentals and their decline was more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to Cars.com Inc. (NYSE:CARS) changed recently.
Is Cars.com Inc. (NYSE:CARS) a worthy investment right now? Money managers are in a bearish mood. The number of long hedge fund bets shrunk by 12 lately. Our calculations also showed that CARS isn't among the 30 most popular stocks among hedge funds.
Why do we pay any attention at all to hedge fund sentiment? 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 32 percentage points since May 2014 through March 12, 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 27.5% through March 12, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Let's view the new hedge fund action encompassing Cars.com Inc. (NYSE:CARS).
How have hedgies been trading Cars.com Inc. (NYSE:CARS)?
Heading into the first quarter of 2019, a total of 18 of the hedge funds tracked by Insider Monkey were long this stock, a change of -40% from the previous quarter. The graph below displays the number of hedge funds with bullish position in CARS over the last 14 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Starboard Value LP held the most valuable stake in Cars.com Inc. (NYSE:CARS), which was worth $140.7 million at the end of the fourth quarter. On the second spot was Sessa Capital which amassed $38.1 million worth of shares. Moreover, Steadfast Capital Management, Kavi Asset Management, and Silver Point Capital were also bullish on Cars.com Inc. (NYSE:CARS), allocating a large percentage of their portfolios to this stock.
Judging by the fact that Cars.com Inc. (NYSE:CARS) has faced falling interest from the entirety of the hedge funds we track, it's safe to say that there is a sect of hedgies who were dropping their entire stakes by the end of the third quarter. Interestingly, David Steinberg and Eric Udoff's Marlowe Partners cut the biggest stake of the "upper crust" of funds watched by Insider Monkey, comprising about $12.5 million in stock, and Frederick DiSanto's Ancora Advisors was right behind this move, as the fund said goodbye to about $9.3 million worth. These transactions are important to note, as aggregate hedge fund interest was cut by 12 funds by the end of the third quarter.
Let's go over hedge fund activity in other stocks similar to Cars.com Inc. (NYSE:CARS). These stocks are Kaiser Aluminum Corp. (NASDAQ:KALU), Chesapeake Lodging Trust (NYSE:CHSP), Cubic Corporation (NYSE:CUB), and State Auto Financial Corporation (NASDAQ:STFC). This group of stocks' market valuations match CARS's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position KALU,14,122108,-3 CHSP,12,16753,3 CUB,22,97403,4 STFC,4,16052,1 Average,13,63079,1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 13 hedge funds with bullish positions and the average amount invested in these stocks was $63 million. That figure was $307 million in CARS's case. Cubic Corporation (NYSE:CUB) is the most popular stock in this table. On the other hand State Auto Financial Corporation (NASDAQ:STFC) is the least popular one with only 4 bullish hedge fund positions. Cars.com Inc. (NYSE:CARS) 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 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately CARS wasn't nearly as popular as these 15 stock and hedge funds that were betting on CARS were disappointed as the stock returned -3.7% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.
Disclosure: None. This article was originally published at Insider Monkey.