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Were Hedge Funds Right About Lithia Motors Inc (LAD)?

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We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Lithia Motors Inc (NYSE:LAD) and determine whether hedge funds skillfully traded this stock.

Is Lithia Motors Inc (NYSE:LAD) a healthy stock for your portfolio? Money managers were in an optimistic mood. The number of bullish hedge fund positions inched up by 1 in recent months. Lithia Motors Inc (NYSE:LAD) was in 64 hedge funds' portfolios at the end of the third quarter of 2021. The all time high for this statistic was previously 63. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that LAD isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings).

Andreas Halvorsen
Andreas Halvorsen

Andreas Halvorsen of Viking Global

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so we go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Now let's view the latest hedge fund action surrounding Lithia Motors Inc (NYSE:LAD).

Do Hedge Funds Think LAD Is A Good Stock To Buy Now?

At the end of the third quarter, a total of 64 of the hedge funds tracked by Insider Monkey were long this stock, a change of 2% from the second quarter of 2021. Below, you can check out the change in hedge fund sentiment towards LAD over the last 25 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is LAD A Good Stock To Buy?
Is LAD A Good Stock To Buy?

Among these funds, Abrams Capital Management held the most valuable stake in Lithia Motors Inc (NYSE:LAD), which was worth $745.4 million at the end of the third quarter. On the second spot was Viking Global which amassed $254.7 million worth of shares. Southpoint Capital Advisors, Lyrical Asset Management, and Sachem Head Capital 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 Abrams Capital Management allocated the biggest weight to Lithia Motors Inc (NYSE:LAD), around 16.26% of its 13F portfolio. Tensile Capital is also relatively very bullish on the stock, setting aside 11.62 percent of its 13F equity portfolio to LAD.

As one would reasonably expect, key money managers were leading the bulls' herd. Sachem Head Capital, managed by Scott Ferguson, assembled the most outsized position in Lithia Motors Inc (NYSE:LAD). Sachem Head Capital had $134 million invested in the company at the end of the quarter. Renaissance Technologies also initiated a $19.4 million position during the quarter. The other funds with new positions in the stock are Brad Dunkley and Blair Levinsky's Waratah Capital Advisors, Peter Avellone's Cartenna Capital, and Stanley Druckenmiller's Duquesne Capital.

Let's also examine hedge fund activity in other stocks similar to Lithia Motors Inc (NYSE:LAD). These stocks are Amdocs Limited (NYSE:DOX), NiSource Inc. (NYSE:NI), TFI International Inc. (NYSE:TFII), The Middleby Corporation (NASDAQ:MIDD), Altice USA, Inc. (NYSE:ATUS), CAE, Inc. (NYSE:CAE), and China Southern Airlines Co Ltd (NYSE:ZNH). This group of stocks' market valuations resemble LAD's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DOX,24,824398,-5 NI,24,435539,-12 TFII,23,270343,10 MIDD,29,567959,-6 ATUS,59,1167928,15 CAE,7,83687,-3 ZNH,3,8197,1 Average,24.1,479722,0 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.1 hedge funds with bullish positions and the average amount invested in these stocks was $480 million. That figure was $2823 million in LAD's case. Altice USA, Inc. (NYSE:ATUS) is the most popular stock in this table. On the other hand China Southern Airlines Co Ltd (NYSE:ZNH) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Lithia Motors Inc (NYSE:LAD) is more popular among hedge funds. Our overall hedge fund sentiment score for LAD is 86. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 29.6% in 2021 and still beat the market by 3.6 percentage points. Unfortunately, LAD wasn't nearly as popular as these 5 stocks and hedge funds that were betting on LAD were disappointed as the stock returned -7.8% since the end of the third quarter (through 1/31) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as all of these stocks already outperformed the market since 2019.

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