Did Hedge Funds Make The Right Call On Credit Acceptance Corp. (CACC) ?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Credit Acceptance Corp. (NASDAQ:CACC) and determine whether hedge funds had an edge regarding this stock.

Is Credit Acceptance Corp. (NASDAQ:CACC) ready to rally soon? Investors who are in the know were taking a pessimistic view. The number of long hedge fund positions fell by 9 recently. Our calculations also showed that CACC isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). CACC was in 22 hedge funds’ portfolios at the end of March. There were 31 hedge funds in our database with CACC positions at the end of the previous quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 S&P 500 ETFs by more than 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

William Von Mueffling - Cantillon Capital Management

William Von Mueffling of Cantillon Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. Now we’re going to take a peek at the recent hedge fund action encompassing Credit Acceptance Corp. (NASDAQ:CACC).

How are hedge funds trading Credit Acceptance Corp. (NASDAQ:CACC)?

At Q1’s end, a total of 22 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -29% from the previous quarter. By comparison, 28 hedge funds held shares or bullish call options in CACC a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Gobi Capital held the most valuable stake in Credit Acceptance Corp. (NASDAQ:CACC), which was worth $133.4 million at the end of the third quarter. On the second spot was BloombergSen which amassed $122.9 million worth of shares. Cantillon Capital Management, Abrams Bison Investments, and Immersion 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 Billings Capital Management allocated the biggest weight to Credit Acceptance Corp. (NASDAQ:CACC), around 26.06% of its 13F portfolio. Abrams Bison Investments is also relatively very bullish on the stock, dishing out 19.56 percent of its 13F equity portfolio to CACC.

Seeing as Credit Acceptance Corp. (NASDAQ:CACC) has witnessed falling interest from the entirety of the hedge funds we track, it’s easy to see that there was a specific group of money managers who sold off their positions entirely last quarter. At the top of the heap, Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners cut the biggest stake of the “upper crust” of funds followed by Insider Monkey, worth close to $44.9 million in stock. Jonathan Auerbach’s fund, Hound Partners, also sold off its stock, about $39.1 million worth. These transactions are important to note, as aggregate hedge fund interest was cut by 9 funds last quarter.

Let’s now review hedge fund activity in other stocks similar to Credit Acceptance Corp. (NASDAQ:CACC). These stocks are Tallgrass Energy, LP (NYSE:TGE), BWX Technologies Inc (NYSE:BWXT), Tech Data Corp (NASDAQ:TECD), and Old Republic International Corporation (NYSE:ORI). All of these stocks’ market caps are similar to CACC’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TGE 38 692822 7
BWXT 24 107937 2
TECD 39 797204 5
ORI 27 241456 7
Average 32 459855 5.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 32 hedge funds with bullish positions and the average amount invested in these stocks was $460 million. That figure was $581 million in CACC’s case. Tech Data Corp (NASDAQ:TECD) is the most popular stock in this table. On the other hand BWX Technologies Inc (NYSE:BWXT) is the least popular one with only 24 bullish hedge fund positions. Compared to these stocks Credit Acceptance Corp. (NASDAQ:CACC) is even less popular than BWXT. Hedge funds clearly dropped the ball on CACC as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 12.3% in 2020 through June 30th and still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on CACC as the stock returned 63.9% in the second quarter and outperformed the market by an even larger margin.

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