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Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts usually don't make them change their opinion towards a company. This time it may be different. The coronavirus pandemic destroyed the high correlations among major industries and asset classes. We are now in a stock pickers market where fundamentals of a stock have more effect on the price than the overall direction of the market. As a result we observe sudden and large changes in hedge fund positions depending on the news flow. Let’s take a look at the hedge fund sentiment towards CarMax Inc (NYSE:KMX) to find out whether there were any major changes in hedge funds' views.
Is KMX a good stock to buy now? CarMax Inc (NYSE:KMX) shareholders have witnessed an increase in hedge fund sentiment lately. CarMax Inc (NYSE:KMX) was in 54 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistics is 50. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 46 hedge funds in our database with KMX positions at the end of the second quarter. Our calculations also showed that KMX isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks).
Video: Watch our video about the top 5 most popular hedge fund stocks.
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' 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 S&P 500 ETFs by 66 percentage points since March 2017 (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.
Ian Wace of Marshall Wace
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets. Tesla’s stock price skyrocketed, yet lithium prices are still below their 2019 highs. So, we are checking out this lithium stock right now. We go through lists like the 15 best blue chip stocks to buy to pick the best large-cap stocks to buy. 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 website. Now we're going to take a look at the latest hedge fund action regarding CarMax Inc (NYSE:KMX).
What does smart money think about CarMax Inc (NYSE:KMX)?
At third quarter's end, a total of 54 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 17% from the second quarter of 2020. Below, you can check out the change in hedge fund sentiment towards KMX over the last 21 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, Akre Capital Management held the most valuable stake in CarMax Inc (NYSE:KMX), which was worth $687.5 million at the end of the third quarter. On the second spot was Palestra Capital Management which amassed $181 million worth of shares. Giverny Capital, Wallace R. Weitz & Co., and BlueDrive Global Investors 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 Silver Heights Capital Management allocated the biggest weight to CarMax Inc (NYSE:KMX), around 19.44% of its 13F portfolio. Lansing Management is also relatively very bullish on the stock, setting aside 14.29 percent of its 13F equity portfolio to KMX.
As one would reasonably expect, specific money managers have jumped into CarMax Inc (NYSE:KMX) headfirst. Palestra Capital Management, managed by Andrew Immerman and Jeremy Schiffman, initiated the biggest position in CarMax Inc (NYSE:KMX). Palestra Capital Management had $181 million invested in the company at the end of the quarter. Oscar Hattink's BlueDrive Global Investors also initiated a $48.2 million position during the quarter. The following funds were also among the new KMX investors: Robert Boucai's Newbrook Capital Advisors, Paul Marshall and Ian Wace's Marshall Wace LLP, and Clint Carlson's Carlson Capital.
Let's now review hedge fund activity in other stocks similar to CarMax Inc (NYSE:KMX). These stocks are Altice USA, Inc. (NYSE:ATUS), Steris Plc (NYSE:STE), Ingersoll Rand Inc. (NYSE:IR), SK Telecom Co., Ltd. (NYSE:SKM), Qorvo Inc (NASDAQ:QRVO), Warner Music Group Corp. (NASDAQ:WMG), and Martin Marietta Materials, Inc. (NYSE:MLM). This group of stocks' market caps resemble KMX's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ATUS,62,3526439,5 STE,30,676397,-10 IR,26,758110,-5 SKM,4,111261,-4 QRVO,51,1668362,0 WMG,20,662192,-11 MLM,38,1934050,-13 Average,33,1333830,-5.4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 33 hedge funds with bullish positions and the average amount invested in these stocks was $1334 million. That figure was $1450 million in KMX's case. Altice USA, Inc. (NYSE:ATUS) is the most popular stock in this table. On the other hand SK Telecom Co., Ltd. (NYSE:SKM) is the least popular one with only 4 bullish hedge fund positions. CarMax Inc (NYSE:KMX) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for KMX is 83.1. 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. 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 31.6% in 2020 through December 2nd and beat the market again by 16 percentage points. Unfortunately KMX wasn't nearly as popular as these 20 stocks and hedge funds that were betting on KMX were disappointed as the stock returned 5% since the end of September (through 12/2) 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.
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Disclosure: None. This article was originally published at Insider Monkey.