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Is KAR Auction Services Inc (KAR) Going to Burn These Hedge Funds?

Russell 2000 ETF (IWM) lagged the larger S&P 500 ETF (SPY) by more than 10 percentage points since the end of the third quarter of 2018 as investors first worried over the possible ramifications of rising interest rates and the escalation of the trade war with China. The hedge funds and institutional investors we track typically invest more in smaller-cap stocks than an average investor (i.e. only about 60% S&P 500 constituents were among the 500 most popular stocks among hedge funds), and we have seen data that shows those funds paring back their overall exposure. Those funds cutting positions in small-caps is one reason why volatility has increased. In the following paragraphs, we take a closer look at what hedge funds and prominent investors think of KAR Auction Services Inc (NYSE:KAR) and see how the stock is affected by the recent hedge fund activity.

Is KAR Auction Services Inc (NYSE:KAR) a healthy stock for your portfolio? Money managers are in a pessimistic mood. The number of long hedge fund bets fell by 2 lately. Our calculations also showed that KAR isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). KAR was in 30 hedge funds’ portfolios at the end of the third quarter of 2019. There were 32 hedge funds in our database with KAR positions at the end of the previous quarter.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Why do we pay any attention at all to hedge fund sentiment? 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.

Jeffrey Gates of Gates Capital Management

Jeffrey Gates of Gates Capital Management

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. Let’s take a look at the latest hedge fund action encompassing KAR Auction Services Inc (NYSE:KAR).

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

At Q3’s end, a total of 30 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -6% from one quarter earlier. By comparison, 28 hedge funds held shares or bullish call options in KAR a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

KAR_dec2019

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Lee Ainslie’s Maverick Capital has the largest position in KAR Auction Services Inc (NYSE:KAR), worth close to $139.5 million, accounting for 2.1% of its total 13F portfolio. Sitting at the No. 2 spot is Gates Capital Management, led by Jeffrey Gates, holding a $117.1 million position; 5.1% of its 13F portfolio is allocated to the company. Some other peers that hold long positions contain Amy Minella’s Cardinal Capital, Cliff Asness’s AQR Capital Management and Renaissance Technologies. In terms of the portfolio weights assigned to each position SkyTop Capital Management allocated the biggest weight to KAR Auction Services Inc (NYSE:KAR), around 10.78% of its portfolio. AWH Capital is also relatively very bullish on the stock, dishing out 5.22 percent of its 13F equity portfolio to KAR.

Since KAR Auction Services Inc (NYSE:KAR) has faced falling interest from the smart money, it’s easy to see that there was a specific group of funds who were dropping their entire stakes heading into Q4. Interestingly, Matt Sirovich and Jeremy Mindich’s Scopia Capital said goodbye to the biggest investment of all the hedgies watched by Insider Monkey, worth an estimated $64.1 million in stock. John Brennan’s fund, Sirios Capital Management, also sold off its stock, about $23.3 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 2 funds heading into Q4.

Let’s check out hedge fund activity in other stocks similar to KAR Auction Services Inc (NYSE:KAR). We will take a look at B2Gold Corp (NYSE:BTG), United States Cellular Corporation (NYSE:USM), PBF Energy Inc (NYSE:PBF), and Five9 Inc (NASDAQ:FIVN). This group of stocks’ market values match KAR’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BTG 14 186035 -3
USM 18 139096 3
PBF 28 245436 2
FIVN 31 579426 8
Average 22.75 287498 2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.75 hedge funds with bullish positions and the average amount invested in these stocks was $287 million. That figure was $575 million in KAR’s case. Five9 Inc (NASDAQ:FIVN) is the most popular stock in this table. On the other hand B2Gold Corp (NYSE:BTG) is the least popular one with only 14 bullish hedge fund positions. KAR Auction Services Inc (NYSE:KAR) is not the most popular stock in this group but hedge fund interest is still above average. 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 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. Unfortunately KAR wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on KAR were disappointed as the stock returned -14% during the fourth quarter (through the end of November) 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 many of these stocks already outperformed the market so far this year.

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

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