Do Hedge Funds Love IAA, Inc. (IAA)?

At Insider Monkey, we pore over the filings of nearly 866 top investment firms every quarter, a process we have now completed for the latest reporting period. The data we’ve gathered as a result gives us access to a wealth of collective knowledge based on these firms’ portfolio holdings as of March 31st. In this article, we will use that wealth of knowledge to determine whether or not IAA, Inc. (NYSE:IAA) makes for a good investment right now.

Hedge fund interest in IAA, Inc. (NYSE:IAA) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that IAA isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings). The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as ChargePoint Holdings, Inc. (NYSE:CHPT), FLIR Systems, Inc. (NASDAQ:FLIR), and Tempur Sealy International Inc. (NYSE:TPX) to gather more data points.

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 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 115 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.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. 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. Now let’s take a look at the latest hedge fund action surrounding IAA, Inc. (NYSE:IAA).

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

Heading into the second quarter of 2021, a total of 35 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. On the other hand, there were a total of 39 hedge funds with a bullish position in IAA a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were increasing their stakes substantially (or already accumulated large positions).

More specifically, Third Point was the largest shareholder of IAA, Inc. (NYSE:IAA), with a stake worth $479.6 million reported as of the end of March. Trailing Third Point was Melvin Capital Management, which amassed a stake valued at $341.9 million. Gates Capital Management, Melvin Capital Management, and Candlestick Capital Management 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 Gates Capital Management allocated the biggest weight to IAA, Inc. (NYSE:IAA), around 4.63% of its 13F portfolio. Third Point is also relatively very bullish on the stock, dishing out 3.23 percent of its 13F equity portfolio to IAA.

Because IAA, Inc. (NYSE:IAA) has experienced bearish sentiment from the smart money, it’s safe to say that there were a few hedge funds who sold off their positions entirely heading into Q2. It’s worth mentioning that Eric Bannasch’s Cadian Capital said goodbye to the biggest position of the 750 funds tracked by Insider Monkey, worth close to $120.1 million in stock. Ryan Tolkin (CIO)’s fund, Schonfeld Strategic Advisors, also dropped its stock, about $1.8 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as IAA, Inc. (NYSE:IAA) but similarly valued. These stocks are ChargePoint Holdings, Inc. (NYSE:CHPT), FLIR Systems, Inc. (NASDAQ:FLIR), Tempur Sealy International Inc. (NYSE:TPX), Chemed Corporation (NYSE:CHE), Skillz Inc. (NYSE:SKLZ), Tetra Tech, Inc. (NASDAQ:TTEK), and Lincoln Electric Holdings, Inc. (NASDAQ:LECO). This group of stocks’ market valuations match IAA’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.6 hedge funds with bullish positions and the average amount invested in these stocks was $530 million. That figure was $1199 million in IAA’s case. Tempur Sealy International Inc. (NYSE:TPX) is the most popular stock in this table. On the other hand Lincoln Electric Holdings, Inc. (NASDAQ:LECO) is the least popular one with only 19 bullish hedge fund positions. IAA, Inc. (NYSE:IAA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for IAA is 73.9. 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 positive signal but 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 19.3% in 2021 through June 25th and beat the market again by 4.8 percentage points. Unfortunately IAA wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on IAA were disappointed as the stock returned -0.8% since the end of March (through 6/25) 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 many of these stocks already outperformed the market since 2019.

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