Hedge funds are known to underperform the bull markets but that’s not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Index ETFs returned approximately 27.5% through the end of November (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds’ consensus stock picks rather than directly investing in hedge funds. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in stocks like Cars.com Inc. (NYSE:CARS), SMART Global Holdings, Inc. (NASDAQ:SGH), Fiverr International Ltd. (NYSE:FVRR), BlackRock MuniVest Fund, Inc. (NYSE:MVF), and Forrester Research, Inc. (NASDAQ:FORR). All of these stocks had similar market caps at the end of September.
Is Cars.com Inc. (NYSE:CARS) a buy here? The best stock pickers are turning bullish. The number of bullish hedge fund bets went up by 2 recently. Our calculations also showed that CARS isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
Video: Click the image to 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 has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (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 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Seth Klarman of Baupost Group
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. We’re going to take a gander at the key hedge fund action regarding Cars.com Inc. (NYSE:CARS).
What have hedge funds been doing with Cars.com Inc. (NYSE:CARS)?
At the end of the third quarter, a total of 31 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 7% from the second quarter of 2019. By comparison, 30 hedge funds held shares or bullish call options in CARS 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.
The largest stake in Cars.com Inc. (NYSE:CARS) was held by Baupost Group, which reported holding $26.9 million worth of stock at the end of September. It was followed by Sessa Capital with a $24.1 million position. Other investors bullish on the company included Steadfast Capital Management, AQR Capital Management, and Millennium Management. In terms of the portfolio weights assigned to each position Clearline Capital allocated the biggest weight to Cars.com Inc. (NYSE:CARS), around 3.45% of its portfolio. Greenvale Capital is also relatively very bullish on the stock, earmarking 3.23 percent of its 13F equity portfolio to CARS.
As industrywide interest jumped, specific money managers have been driving this bullishness. Baupost Group, managed by Seth Klarman, created the most outsized position in Cars.com Inc. (NYSE:CARS). Baupost Group had $26.9 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also initiated a $9.7 million position during the quarter. The following funds were also among the new CARS investors: Andrew Kurita’s Kettle Hill Capital Management, Paul Marshall and Ian Wace’s Marshall Wace, and Donald Sussman’s Paloma Partners.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Cars.com Inc. (NYSE:CARS) but similarly valued. We will take a look at SMART Global Holdings, Inc. (NASDAQ:SGH), Fiverr International Ltd. (NYSE:FVRR), BlackRock MuniVest Fund, Inc. (NYSE:MVF), and Forrester Research, Inc. (NASDAQ:FORR). This group of stocks’ market valuations are similar to CARS’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| SGH | 17 | 285893 | 7 |
| FVRR | 5 | 9126 | -4 |
| MVF | 1 | 586 | 0 |
| FORR | 13 | 46630 | 3 |
| Average | 9 | 85559 | 1.5 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 9 hedge funds with bullish positions and the average amount invested in these stocks was $86 million. That figure was $172 million in CARS’s case. SMART Global Holdings, Inc. (NASDAQ:SGH) is the most popular stock in this table. On the other hand BlackRock MuniVest Fund, Inc. (NYSE:MVF) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks Cars.com Inc. (NYSE:CARS) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Hedge funds were also right about betting on CARS as the stock returned 48% during the first two months of Q4 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
Disclosure: None. This article was originally published at Insider Monkey.
