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Avis Budget Group Inc. (CAR) Beats Estimates in Q2 but Lowers Full-Year Guidance: Is It A Buy?

Avis Budget Group Inc. (NASDAQ:CAR) reported its second-quarter results after the closing bell on Monday. Vehicle rental and car sharing service provider disclosed earnings of $0.84 per share, compared to the consensus expectation of $0.68, but missed the expectation on revenues. Avis Budget Group Inc. (NASDAQ:CAR) posted a total revenue of $2.2 billion for the quarter missing the Street’s expectation by $40 million. During the same period in 2014, the company delivered earnings of $0.68 per share on revenue of $2.19 billion.

“Our second quarter results reflect organic volume growth partially offset by lower pricing, contributions from the tuck-in acquisitions we’ve completed in the past twelve months, and continued margin improvement,” CEO of Avis, Ronald Nelson, was quoted as saying in a statement.

Avis Budget Group Inc. (NASDAQ:CAR)’s board of directors also increased its share repurchase authorization by $250 million, summing the total repurchase authorization to $420 million from July 1 onwards. On the negative side, the company lowered if full-year guidance for 2015 as it expects increased pressure from weak pricing and a stronger dollar. Avis Budget Group Inc. (NASDAQ:CAR) lowered its full-year guidance for revenues to $8.6 – $8.7 billion, which was at $8.8 billion before. The company forecasts the full-year earnings per share between $3.15 and $3.45, which was around $3.15 – $3.75 before. The Street expects the company to post full-year earnings of $3.40 per share on revenue of $8.76 billion. Avis Budget Group Inc. (NASDAQ:CAR)’s stock jumped by more than 4% on the back of the news, but it lost 35% so far in 2015. What did hedge funds think about this stock? Is it a buy at the moment?

Nuno Andre/

Nuno Andre/

Heading into the second quarter, a total of 43 of the hedge funds tracked by Insider Monkey were holding long position in Avis Budget Group Inc. (NASDAQ:CAR) with a total investment of around $3.1 billion. However, at the end of 2014, there were 51 hedge funds with around $3.9 billion investment in the stock. During the first three months of 2015, the stock had lost around 11% of its value. Compared against a 20% reduction in investment by hedge funds, we can say that the hedge funds remained bearish on the stock and opted to pull money out of this stock during the first trimester.

Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research has shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return more than 123% over the last 34 months and outperformed the S&P 500 ETF (SPY) by 66 percentage points (see the details here).

Likewise, other research (not our own) has shown insider purchases are also effective piggybacking methods for investors that lead to greater returns. That’s why we believe investors should pay attention to what hedge funds and insiders are buying and keep them apprised of this information. Looking at Avis Budget Group Inc. (NASDAQ:CAR), there have been no insider purchases of the shares during the first three months, but there were a few insider sales. Notably, Chief Financial Officer and Executive Vice President of Avis Budget Group Inc. (NASDAQ:CAR), David Wyshner, sold some 38,000 shares and President, International, Larry De Shon, sold around 25,000 shares in March.

How are hedge funds trading Avis Budget Group Inc. (NASDAQ:CAR)?

Of the hedge funds tracked by Insider Monkey, Karthik Sarma’s SRS Investment Management had the largest position in Avis Budget Group Inc. (NASDAQ:CAR), with around 10 million shares worth close to $590.2 million, corresponding to 23.3% of its total 13F portfolio, by the end of March. Coming in second is Glenview Capital, managed by Larry Robbins, with around 7 million shares valued at $418.6 million. Other ‘hedgies’ with similar optimism include Chase Coleman‘s Tiger Global Management, David Cohen and Harold Levy’s Iridian Asset Management and Jeffrey Tannenbaum‘s Fir Tree.

Since Avis Budget Group Inc. (NASDAQ:CAR) has witnessed falling interest from hedge fund managers, we can see that there exists a select few hedge fund managers who sold off their positions heading into the second quarter. At the top of the heap, Richard McGuire’s Marcato Capital Management cut the biggest stake, which previously contained some 3.3 million shares, while Brian Jackelow‘s SAB Capital Management unloaded 2.2 million shares. These moves are important to note, as aggregate hedge fund interest fell by eight funds during the January – March period.

Overall, hedge funds were bearish on Avis Budget Group Inc. (NASDAQ:CAR) and they were right to remain bearish as the stock had lost around 25% of its value since the end of the first quarter. Despite the earnings beat, the company’s decision to lower its guidance for full-year might work against the stock in the near future. Considering the bearish hedge fund sentiment coupled with lowered full-year guidance we don’t recommend to buy this stock at the moment.

Disclosure: None

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