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Did Hedge Funds Make The Right Call On Lithia Motors Inc (LAD) ?

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.

Lithia Motors Inc (NYSE:LAD) was in 27 hedge funds’ portfolios at the end of the first quarter of 2020. LAD has seen a decrease in hedge fund interest lately. There were 29 hedge funds in our database with LAD holdings at the end of the previous quarter. Our calculations also showed that LAD 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).

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

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research was 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

David Abrams

David Abrams of Abrams Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to view the latest hedge fund action surrounding Lithia Motors Inc (NYSE:LAD).

How have hedgies been trading Lithia Motors Inc (NYSE:LAD)?

Heading into the second quarter of 2020, a total of 27 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -7% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards LAD over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Abrams Capital Management was the largest shareholder of Lithia Motors Inc (NYSE:LAD), with a stake worth $182.1 million reported as of the end of September. Trailing Abrams Capital Management was Cardinal Capital, which amassed a stake valued at $61.3 million. Park West Asset Management, Tensile Capital, and Eminence 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 7.17% of its 13F portfolio. Tensile Capital is also relatively very bullish on the stock, designating 4.91 percent of its 13F equity portfolio to LAD.

Seeing as Lithia Motors Inc (NYSE:LAD) has faced declining sentiment from the entirety of the hedge funds we track, logic holds that there exists a select few hedge funds who sold off their full holdings in the first quarter. Interestingly, Ken Heebner’s Capital Growth Management sold off the largest stake of all the hedgies watched by Insider Monkey, valued at an estimated $23.2 million in stock, and Sander Gerber’s Hudson Bay Capital Management was right behind this move, as the fund sold off about $4.6 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 2 funds in the first quarter.

Let’s check out hedge fund activity in other stocks similar to Lithia Motors Inc (NYSE:LAD). We will take a look at Kennedy-Wilson Holdings Inc (NYSE:KW), Acushnet Holdings Corp. (NYSE:GOLF), Park Hotels & Resorts Inc. (NYSE:PK), and IBERIABANK Corporation (NASDAQ:IBKC). This group of stocks’ market caps match LAD’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
KW 22 308206 5
GOLF 12 14131 -4
PK 26 162562 13
IBKC 30 129219 -2
Average 22.5 153530 3

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.5 hedge funds with bullish positions and the average amount invested in these stocks was $154 million. That figure was $388 million in LAD’s case. IBERIABANK Corporation (NASDAQ:IBKC) is the most popular stock in this table. On the other hand Acushnet Holdings Corp. (NYSE:GOLF) is the least popular one with only 12 bullish hedge fund positions. Lithia Motors Inc (NYSE:LAD) is not the most popular stock in this group but hedge fund interest is still above average. 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 but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on LAD as the stock returned 85.6% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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