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Were Hedge Funds Right About Sonic Automotive Inc (SAH)?

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After several tireless days we have finished crunching the numbers from nearly 900 13F filings issued by the elite hedge funds and other investment firms that we track at Insider Monkey, which disclosed those firms' equity portfolios as of March 31st. The results of that effort will be put on display in this article, as we share valuable insight into the smart money sentiment towards Sonic Automotive Inc (NYSE:SAH).

Sonic Automotive Inc (NYSE:SAH) was in 17 hedge funds' portfolios at the end of March. The all time high for this statistic is 20. SAH has seen a decrease in activity from the world's largest hedge funds lately. There were 18 hedge funds in our database with SAH holdings at the end of December. Our calculations also showed that SAH isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings).

Today there are a multitude of tools market participants have at their disposal to grade their holdings. Some of the less utilized tools are hedge fund and insider trading signals. We have shown that, historically, those who follow the top picks of the elite money managers can outpace their index-focused peers by a healthy amount (see the details here). Also, our monthly newsletter's portfolio of long stock picks returned 206.8% since March 2017 (through May 2021) and beat the S&P 500 Index by more than 115 percentage points. You can download a sample issue of this newsletter on our website .

Peter Algert of Algert Global

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 15 best Jim Cramer stocks to identify the next Tesla that will deliver outsized returns. 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 homepage. With all of this in mind let's analyze the fresh hedge fund action encompassing Sonic Automotive Inc (NYSE:SAH).

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

At the end of March, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -6% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in SAH over the last 23 quarters. With hedge funds' sentiment swirling, there exists an "upper tier" of notable hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

Among these funds, Citadel Investment Group held the most valuable stake in Sonic Automotive Inc (NYSE:SAH), which was worth $31.2 million at the end of the fourth quarter. On the second spot was Teewinot Capital Advisers which amassed $16 million worth of shares. Arrowstreet Capital, Royce & Associates, and D E Shaw 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 Teewinot Capital Advisers allocated the biggest weight to Sonic Automotive Inc (NYSE:SAH), around 4.21% of its 13F portfolio. Algert Global is also relatively very bullish on the stock, setting aside 0.2 percent of its 13F equity portfolio to SAH.

Judging by the fact that Sonic Automotive Inc (NYSE:SAH) has witnessed declining sentiment from the smart money, it's safe to say that there were a few hedge funds who sold off their entire stakes heading into Q2. Interestingly, Ken Heebner's Capital Growth Management cut the largest position of the 750 funds monitored by Insider Monkey, comprising an estimated $11.2 million in stock. Marc Majzner's fund, Clearline Capital, also cut its stock, about $1.6 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 1 funds heading into Q2.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Sonic Automotive Inc (NYSE:SAH) but similarly valued. These stocks are Sandy Spring Bancorp Inc. (NASDAQ:SASR), Eventbrite, Inc. (NYSE:EB), Health Catalyst, Inc (NASDAQ:HCAT), Constellium SE (NYSE:CSTM), Bottomline Technologies (de), Inc. (NASDAQ:EPAY), USANA Health Sciences, Inc. (NYSE:USNA), and Century Communities, Inc (NYSE:CCS). This group of stocks' market valuations resemble SAH's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SASR,12,38897,4 EB,24,351562,-2 HCAT,20,134687,-1 CSTM,36,377226,1 EPAY,19,98039,1 USNA,19,250382,-3 CCS,24,123486,6 Average,22,196326,0.9 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 22 hedge funds with bullish positions and the average amount invested in these stocks was $196 million. That figure was $102 million in SAH's case. Constellium SE (NYSE:CSTM) is the most popular stock in this table. On the other hand Sandy Spring Bancorp Inc. (NASDAQ:SASR) is the least popular one with only 12 bullish hedge fund positions. Sonic Automotive Inc (NYSE:SAH) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for SAH is 39.9. 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 negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. 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 28.5% in 2021 through July 23rd and surpassed the market again by 10.1 percentage points. Unfortunately SAH wasn't nearly as popular as these 5 stocks (hedge fund sentiment was quite bearish); SAH investors were disappointed as the stock returned -1% since the end of March (through 7/23) 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 most of these stocks already outperformed the market in 2021.

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