Hedge Funds Never Been Less Bullish On KAR Auction Services Inc (KAR)

In this article we will check out the progression of hedge fund sentiment towards KAR Auction Services Inc (NYSE:KAR) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Is KAR Auction Services Inc (NYSE:KAR) a good investment now? Money managers are becoming less hopeful. The number of bullish hedge fund positions dropped by 5 recently. Our calculations also showed that KAR 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). KAR was in 21 hedge funds’ portfolios at the end of the first quarter of 2020. There were 26 hedge funds in our database with KAR positions at the end of the previous quarter.

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 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 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 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.

Rudolph Kluiber of GRT Capital Partners

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out trades like this one. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the 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 gander at the fresh hedge fund action encompassing KAR Auction Services Inc (NYSE:KAR).

What have hedge funds been doing with KAR Auction Services Inc (NYSE:KAR)?

At the end of the first quarter, a total of 21 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -19% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards KAR over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Gates Capital Management was the largest shareholder of KAR Auction Services Inc (NYSE:KAR), with a stake worth $89.4 million reported as of the end of September. Trailing Gates Capital Management was Cardinal Capital, which amassed a stake valued at $48.5 million. Citadel Investment Group, AQR Capital Management, and Arrowstreet 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 Gates Capital Management allocated the biggest weight to KAR Auction Services Inc (NYSE:KAR), around 5.89% of its 13F portfolio. SkyTop Capital Management is also relatively very bullish on the stock, designating 4.89 percent of its 13F equity portfolio to KAR.

Seeing as KAR Auction Services Inc (NYSE:KAR) has faced a decline in interest from the aggregate hedge fund industry, it’s easy to see that there is a sect of funds who sold off their full holdings last quarter. Intriguingly, Renaissance Technologies said goodbye to the biggest stake of all the hedgies followed by Insider Monkey, worth an estimated $16.8 million in stock, and David MacKnight’s One Fin Capital Management was right behind this move, as the fund dropped about $6 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest fell by 5 funds last quarter.

Let’s check out hedge fund activity in other stocks similar to KAR Auction Services Inc (NYSE:KAR). We will take a look at ForeScout Technologies, Inc. (NASDAQ:FSCT), Kennametal Inc. (NYSE:KMT), Albany International Corp. (NYSE:AIN), and FormFactor, Inc. (NASDAQ:FORM). This group of stocks’ market values are similar to KAR’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
FSCT 33 421646 12
KMT 17 147627 -2
AIN 18 51239 -1
FORM 22 92958 0
Average 22.5 178368 2.25

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 $178 million. That figure was $204 million in KAR’s case. ForeScout Technologies, Inc. (NASDAQ:FSCT) is the most popular stock in this table. On the other hand Kennametal Inc. (NYSE:KMT) is the least popular one with only 17 bullish hedge fund positions. KAR Auction Services Inc (NYSE:KAR) is not the least popular stock in this group but hedge fund interest is still below 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 12.2% in 2020 through June 17th and still beat the market by 14.8 percentage points. A small number of hedge funds were also right about betting on KAR as the stock returned 32.6% during the second quarter and outperformed the market by an even larger margin.

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