Is Carvana Co. (CVNA) A Good Stock To Buy?

In this article we will take a look at whether hedge funds think Carvana Co. (NYSE:CVNA) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

Carvana Co. (NYSE:CVNA) investors should be aware of a decrease in enthusiasm from smart money in recent months. CVNA was in 52 hedge funds’ portfolios at the end of the first quarter of 2020. There were 53 hedge funds in our database with CVNA positions at the end of the previous quarter. Our calculations also showed that CVNA 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).

Video: Watch our video about the top 5 most popular hedge fund stocks.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 72% since March 2017 and outperformed the S&P 500 ETFs by more than 44 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Colin Moran Abdiel Capital

Colin Moran of Abdiel Capital Advisors

At Insider Monkey we leave no stone unturned when looking for the next great investment idea.  For example, we are still not out of the woods in terms of the coronavirus pandemic. So, we checked out this analyst’s “corona catalyst plays“. We interview hedge fund managers and ask them about their best ideas. You can watch our latest hedge fund manager interview here and find out the name of the large-cap healthcare stock that Sio Capital’s Michael Castor expects to double. 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 S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to review the fresh hedge fund action surrounding Carvana Co. (NYSE:CVNA).

What does smart money think about Carvana Co. (NYSE:CVNA)?

At Q1’s end, a total of 52 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -2% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards CVNA over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Tiger Global Management LLC, managed by Chase Coleman, holds the largest position in Carvana Co. (NYSE:CVNA). Tiger Global Management LLC has a $331.3 million position in the stock, comprising 2% of its 13F portfolio. The second largest stake is held by Lone Pine Capital, with a $281 million position; the fund has 1.7% of its 13F portfolio invested in the stock. Remaining professional money managers that are bullish include Zachary Sternberg and Benjamin Stein’s Spruce House Investment Management, Clifford A. Sosin’s CAS Investment Partners and Alex Sacerdote’s Whale Rock Capital Management. In terms of the portfolio weights assigned to each position CAS Investment Partners allocated the biggest weight to Carvana Co. (NYSE:CVNA), around 46.33% of its 13F portfolio. Antipodean Advisors is also relatively very bullish on the stock, earmarking 19.83 percent of its 13F equity portfolio to CVNA.

Due to the fact that Carvana Co. (NYSE:CVNA) has experienced a decline in interest from the entirety of the hedge funds we track, it’s safe to say that there were a few funds that slashed their full holdings in the third quarter. At the top of the heap, Karthik Sarma’s SRS Investment Management cut the largest position of all the hedgies followed by Insider Monkey, worth about $58 million in stock, and Bruce Emery’s Greenvale Capital was right behind this move, as the fund dumped about $45.1 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest fell by 1 funds in the third quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Carvana Co. (NYSE:CVNA). We will take a look at Lamb Weston Holdings, Inc. (NYSE:LW), Phillips 66 Partners LP (NYSE:PSXP), Imperial Oil Limited (NYSE:IMO), and Magellan Midstream Partners, L.P. (NYSE:MMP). This group of stocks’ market caps are closest to CVNA’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LW 29 277239 -3
PSXP 5 13913 0
IMO 13 37766 3
MMP 13 52625 -3
Average 15 95386 -0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 15 hedge funds with bullish positions and the average amount invested in these stocks was $95 million. That figure was $1820 million in CVNA’s case. Lamb Weston Holdings, Inc. (NYSE:LW) is the most popular stock in this table. On the other hand Phillips 66 Partners LP (NYSE:PSXP) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Carvana Co. (NYSE:CVNA) is more popular among hedge funds. 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 returned 7.9% in 2020 through May 22nd but still managed to beat the market by 15.6 percentage points. Hedge funds were also right about betting on CVNA as the stock returned 75.1% so far in Q2 (through May 22nd) 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.