Is CARG Stock A Buy or Sell?

In this article you are going to find out whether hedge funds think CarGurus, Inc. (NASDAQ:CARG) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Is CARG stock a buy? Money managers were turning bullish. The number of bullish hedge fund bets increased by 1 lately. CarGurus, Inc. (NASDAQ:CARG) was in 33 hedge funds’ portfolios at the end of December. The all time high for this statistic is 33. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that CARG isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings).

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 124 percentage points since March 2017 (see the details here).

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, the House passed a landmark bill decriminalizing marijuana. So, we are checking out this under the radar cannabis stock right now. We go through lists like the 10 best battery stocks to buy to identify the next stock with 10x upside potential. 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 website. Keeping this in mind let’s take a look at the recent hedge fund action encompassing CarGurus, Inc. (NASDAQ:CARG).

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

At the end of the fourth quarter, a total of 33 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 3% from one quarter earlier. On the other hand, there were a total of 33 hedge funds with a bullish position in CARG a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Eminence Capital was the largest shareholder of CarGurus, Inc. (NASDAQ:CARG), with a stake worth $71.7 million reported as of the end of December. Trailing Eminence Capital was Two Sigma Advisors, which amassed a stake valued at $50.9 million. Arrowstreet Capital, Atreides Management, and Scopia 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 Hill City Capital allocated the biggest weight to CarGurus, Inc. (NASDAQ:CARG), around 7.61% of its 13F portfolio. StackLine Partners is also relatively very bullish on the stock, setting aside 7.05 percent of its 13F equity portfolio to CARG.

As industrywide interest jumped, key hedge funds have been driving this bullishness. Atreides Management, managed by Gavin Baker, initiated the biggest position in CarGurus, Inc. (NASDAQ:CARG). Atreides Management had $40.6 million invested in the company at the end of the quarter. Matt Sirovich and Jeremy Mindich’s Scopia Capital also initiated a $28.8 million position during the quarter. The other funds with new positions in the stock are Kevin Mok’s Hidden Lake Asset Management, Herbert Frazier’s Hill City Capital, and Clayton Gardner and Joe Percoco’s Titan Global Capital.

Let’s also examine hedge fund activity in other stocks similar to CarGurus, Inc. (NASDAQ:CARG). These stocks are Mantech International Corp (NASDAQ:MANT), Altra Industrial Motion Corp. (NASDAQ:AIMC), Stamps.com Inc. (NASDAQ:STMP), Colliers International Group Inc (NASDAQ:CIGI), CareDx, Inc. (NASDAQ:CDNA), Armstrong World Industries, Inc. (NYSE:AWI), and The Brink’s Company (NYSE:BCO). This group of stocks’ market valuations are similar to CARG’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.7 hedge funds with bullish positions and the average amount invested in these stocks was $419 million. That figure was $381 million in CARG’s case. Stamps.com Inc. (NASDAQ:STMP) is the most popular stock in this table. On the other hand Mantech International Corp (NASDAQ:MANT) is the least popular one with only 11 bullish hedge fund positions. CarGurus, Inc. (NASDAQ:CARG) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for CARG is 76.7. 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 30 most popular stocks among hedge funds returned 81.2% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 26 percentage points. These stocks gained 7.9% in 2021 through April 1st and beat the market again by 0.4 percentage points. Unfortunately CARG wasn’t nearly as popular as these 30 stocks and hedge funds that were betting on CARG were disappointed as the stock returned -22.8% since the end of December (through 4/1) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 30 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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