We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Lithia Motors Inc (NYSE:LAD).
Lithia Motors Inc (NYSE:LAD) has experienced an increase in enthusiasm from smart money lately. Our calculations also showed that LAD isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
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 41 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 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
David Abrams of Abrams Capital Management
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to take a peek at the recent hedge fund action surrounding Lithia Motors Inc (NYSE:LAD).
What have hedge funds been doing with Lithia Motors Inc (NYSE:LAD)?
At the end of the fourth quarter, a total of 29 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 12% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards LAD over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Abrams Capital Management, managed by David Abrams, holds the most valuable position in Lithia Motors Inc (NYSE:LAD). Abrams Capital Management has a $327.2 million position in the stock, comprising 10.2% of its 13F portfolio. Sitting at the No. 2 spot is Amy Minella of Cardinal Capital, with a $109.5 million position; 3.3% of its 13F portfolio is allocated to the company. Other members of the smart money that hold long positions consist of Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Noam Gottesman’s GLG Partners and Ken Heebner’s Capital Growth Management. In terms of the portfolio weights assigned to each position Abrams Capital Management allocated the biggest weight to Lithia Motors Inc (NYSE:LAD), around 10.17% of its 13F portfolio. Cardinal Capital is also relatively very bullish on the stock, earmarking 3.34 percent of its 13F equity portfolio to LAD.
Now, key hedge funds have been driving this bullishness. Cinctive Capital Management, managed by Richard SchimeláandáLawrence Sapanski, created the most valuable position in Lithia Motors Inc (NYSE:LAD). Cinctive Capital Management had $7 million invested in the company at the end of the quarter. Brandon Haley’s Holocene Advisors also made a $2.1 million investment in the stock during the quarter. The following funds were also among the new LAD investors: Paul Marshall and Ian Wace’s Marshall Wace LLP, Peter Algert and Kevin Coldiron’s Algert Coldiron Investors, and Jinghua Yan’s TwinBeech Capital.
Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Lithia Motors Inc (NYSE:LAD) but similarly valued. These stocks are Cimpress NV (NASDAQ:CMPR), Equitrans Midstream Corporation (NYSE:ETRN), Graham Holdings Co (NYSE:GHC), and Taro Pharmaceutical Industries Ltd. (NYSE:TARO). All of these stocks’ market caps are closest to LAD’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CMPR | 18 | 707978 | 6 |
| ETRN | 15 | 379764 | -2 |
| GHC | 18 | 510146 | 0 |
| TARO | 12 | 83139 | 1 |
| Average | 15.75 | 420257 | 1.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 15.75 hedge funds with bullish positions and the average amount invested in these stocks was $420 million. That figure was $662 million in LAD’s case. Cimpress NV (NASDAQ:CMPR) is the most popular stock in this table. On the other hand Taro Pharmaceutical Industries Ltd. (NYSE:TARO) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Lithia Motors Inc (NYSE:LAD) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th and still beat the market by 5.5 percentage points. Unfortunately LAD wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on LAD were disappointed as the stock returned -39.9% during the first two and a half months of 2020 (through March 25th) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in Q1.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
