Did Hedge Funds Drop The Ball On Sonic Automotive Inc (SAH) ?

Concerns over rising interest rates and expected further rate increases have hit several stocks hard during the fourth quarter. Trends reversed 180 degrees during the first quarter amid Powell’s pivot and optimistic expectations towards a trade deal with China. Hedge funds and institutional investors tracked by Insider Monkey usually invest a disproportionate amount of their portfolios in smaller cap stocks. We have been receiving indications that hedge funds were increasing their overall exposure in the first quarter and this is one of the factors behind the recent movements in major indices. In this article, we will take a closer look at hedge fund sentiment towards Sonic Automotive Inc (NYSE:SAH).

Sonic Automotive Inc (NYSE:SAH) has seen an increase in hedge fund sentiment lately. SAH was in 11 hedge funds’ portfolios at the end of March. There were 10 hedge funds in our database with SAH holdings at the end of the previous quarter. Our calculations also showed that sah isn’t among the 30 most popular stocks among hedge funds.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 market by 40 percentage points since May 2014 through May 30, 2019 (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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.

Paul Marshall Marshall Wace

Paul Marshall of Marshall Wace

We’re going to take a peek at the latest hedge fund action regarding Sonic Automotive Inc (NYSE:SAH).

What have hedge funds been doing with Sonic Automotive Inc (NYSE:SAH)?

At Q1’s end, a total of 11 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 10% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards SAH over the last 15 quarters. With hedgies’ capital changing hands, there exists an “upper tier” of key hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

No of Hedge Funds with SAH Positions

Among these funds, Millennium Management held the most valuable stake in Sonic Automotive Inc (NYSE:SAH), which was worth $4.1 million at the end of the first quarter. On the second spot was Arrowstreet Capital which amassed $3.4 million worth of shares. Moreover, D E Shaw, Citadel Investment Group, and Marshall Wace LLP were also bullish on Sonic Automotive Inc (NYSE:SAH), allocating a large percentage of their portfolios to this stock.

With a general bullishness amongst the heavyweights, specific money managers were breaking ground themselves. Millennium Management, managed by Israel Englander, initiated the largest position in Sonic Automotive Inc (NYSE:SAH). Millennium Management had $4.1 million invested in the company at the end of the quarter. Joel Greenblatt’s Gotham Asset Management also initiated a $0.1 million position during the quarter.

Let’s now review hedge fund activity in other stocks similar to Sonic Automotive Inc (NYSE:SAH). We will take a look at Care.com Inc (NYSE:CRCM), Zumiez Inc. (NASDAQ:ZUMZ), New Media Investment Group Inc (NYSE:NEWM), and Photronics, Inc. (NASDAQ:PLAB). All of these stocks’ market caps are closest to SAH’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CRCM 18 152719 1
ZUMZ 13 33969 1
NEWM 17 48309 0
PLAB 13 67607 -3
Average 15.25 75651 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.25 hedge funds with bullish positions and the average amount invested in these stocks was $76 million. That figure was $15 million in SAH’s case. Care.com Inc (NYSE:CRCM) is the most popular stock in this table. On the other hand Zumiez Inc. (NASDAQ:ZUMZ) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks Sonic Automotive Inc (NYSE:SAH) is even less popular than ZUMZ. Hedge funds clearly dropped the ball on SAH as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. A small number of hedge funds were also right about betting on SAH as the stock returned 53.9% during the same period and outperformed the market by an even larger margin.

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