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Were Hedge Funds Right About Crowding Into Carvana Co. (CVNA)?

Asma UL Husna
·6 min read

In this article we will take a look at whether hedge funds think Carvana Co. (NYSE:CVNA) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

Carvana Co. (NYSE:CVNA) shareholders have witnessed an increase in hedge fund interest lately. Carvana Co. (NYSE:CVNA) was in 57 hedge funds' portfolios at the end of June. The all time high for this statistics is 53. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 52 hedge funds in our database with CVNA holdings at the end of March. Our calculations also showed that CVNA isn't among the 30 most popular stocks among hedge funds (click for Q2 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 58 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.

Chase Coleman of Tiger Global

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world 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 to get excerpts of these letters in your inbox. With all of this in mind we're going to take a peek at the new hedge fund action surrounding Carvana Co. (NYSE:CVNA).

How have hedgies been trading Carvana Co. (NYSE:CVNA)?

At the end of June, a total of 57 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 10% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards CVNA over the last 20 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

The largest stake in Carvana Co. (NYSE:CVNA) was held by Tiger Global Management LLC, which reported holding $722.8 million worth of stock at the end of September. It was followed by Spruce House Investment Management with a $519.5 million position. Other investors bullish on the company included CAS Investment Partners, Whale Rock Capital Management, and D E Shaw. In terms of the portfolio weights assigned to each position CAS Investment Partners allocated the biggest weight to Carvana Co. (NYSE:CVNA), around 48.85% of its 13F portfolio. Goodnow Investment Group is also relatively very bullish on the stock, earmarking 23.01 percent of its 13F equity portfolio to CVNA.

With a general bullishness amongst the heavyweights, specific money managers were leading the bulls' herd. D1 Capital Partners, managed by Daniel Sundheim, established the most valuable position in Carvana Co. (NYSE:CVNA). D1 Capital Partners had $124.4 million invested in the company at the end of the quarter. John Smith Clark's Southpoint Capital Advisors also initiated a $84.1 million position during the quarter. The following funds were also among the new CVNA investors: Aaron Cowen's Suvretta Capital Management, Jack Woodruff's Candlestick Capital Management, and Brad Stephens's Six Columns Capital.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Carvana Co. (NYSE:CVNA) but similarly valued. These stocks are Alexandria Real Estate Equities Inc (NYSE:ARE), Realty Income Corporation (NYSE:O), Hilton Worldwide Holdings Inc (NYSE:HLT), Rogers Communications Inc. (NYSE:RCI), D.R. Horton, Inc. (NYSE:DHI), Southwest Airlines Co. (NYSE:LUV), and Corteva, Inc. (NYSE:CTVA). This group of stocks' market values resemble CVNA's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ARE,18,53382,-11 O,17,185310,-8 HLT,53,4467377,10 RCI,16,340545,0 DHI,66,2088308,1 LUV,56,873793,11 CTVA,39,775291,3 Average,37.9,1254858,0.9 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 37.9 hedge funds with bullish positions and the average amount invested in these stocks was $1255 million. That figure was $3588 million in CVNA's case. D.R. Horton, Inc. (NYSE:DHI) is the most popular stock in this table. On the other hand Rogers Communications Inc. (NYSE:RCI) is the least popular one with only 16 bullish hedge fund positions. Carvana Co. (NYSE:CVNA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CVNA is 81. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 29.2% in 2020 through October 16th and still beat the market by 19.7 percentage points. Hedge funds were also right about betting on CVNA as the stock returned 84.1% since the end of Q2 (through 10/16) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

Get real-time email alerts: Follow Carvana Co. (NYSE:CVNA)

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

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