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Hedge Funds Have Never Been This Bullish On IAA, Inc. (IAA)

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards IAA, Inc. (NYSE:IAA) at the end of the second quarter and determine whether the smart money was really smart about this stock.

Is IAA, Inc. (NYSE:IAA) a buy here? Money managers were in a bullish mood. The number of bullish hedge fund positions advanced by 4 recently. IAA, Inc. (NYSE:IAA) was in 43 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 42. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that IAA isn’t among the 30 most popular stocks among hedge funds (click for Q2 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 56 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 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

THIRD POINT

Dan Loeb of Third Point

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. With all of this in mind let’s take a look at the latest hedge fund action encompassing IAA, Inc. (NYSE:IAA).

What have hedge funds been doing with IAA, Inc. (NYSE:IAA)?

At second quarter’s end, a total of 43 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 10% from the previous quarter. By comparison, 42 hedge funds held shares or bullish call options in IAA a year ago. With the smart money’s capital changing hands, there exists a few noteworthy hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

More specifically, Third Point was the largest shareholder of IAA, Inc. (NYSE:IAA), with a stake worth $408.3 million reported as of the end of September. Trailing Third Point was Cadian Capital, which amassed a stake valued at $126.4 million. Melvin Capital Management, Southpoint Capital Advisors, and Palestra 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 Lionstone Capital Management allocated the biggest weight to IAA, Inc. (NYSE:IAA), around 5.88% of its 13F portfolio. Third Point is also relatively very bullish on the stock, setting aside 5.59 percent of its 13F equity portfolio to IAA.

As aggregate interest increased, key hedge funds have jumped into IAA, Inc. (NYSE:IAA) headfirst. Cadian Capital, managed by Eric Bannasch, created the most outsized position in IAA, Inc. (NYSE:IAA). Cadian Capital had $126.4 million invested in the company at the end of the quarter. John Smith Clark’s Southpoint Capital Advisors also initiated a $82.9 million position during the quarter. The following funds were also among the new IAA investors: Andrew Immerman and Jeremy Schiffman’s Palestra Capital Management, Keith Meister’s Corvex Capital, and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital.

Let’s also examine hedge fund activity in other stocks similar to IAA, Inc. (NYSE:IAA). We will take a look at BJ’s Wholesale Club Holdings, Inc. (NYSE:BJ), Acceleron Pharma Inc (NASDAQ:XLRN), East West Bancorp, Inc. (NASDAQ:EWBC), Stericycle Inc (NASDAQ:SRCL), Sealed Air Corporation (NYSE:SEE), Flex Ltd. (NASDAQ:FLEX), and Apache Corporation (NASDAQ:APA). This group of stocks’ market valuations are closest to IAA’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BJ 31 246030 5
XLRN 48 803006 10
EWBC 23 224008 -2
SRCL 23 699844 3
SEE 28 812312 -1
FLEX 34 941645 10
APA 40 590803 5
Average 32.4 616807 4.3

View table here if you experience formatting issues.

As you can see these stocks had an average of 32.4 hedge funds with bullish positions and the average amount invested in these stocks was $617 million. That figure was $1326 million in IAA’s case. Acceleron Pharma Inc (NASDAQ:XLRN) is the most popular stock in this table. On the other hand East West Bancorp, Inc. (NASDAQ:EWBC) is the least popular one with only 23 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 79. 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. 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 33% in 2020 through the end of August and still beat the market by 23.2 percentage points. Hedge funds were also right about betting on IAA as the stock returned 35.6% since 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.