Was The Smart Money Right About Carvana Co. (CVNA)?

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Carvana Co. (NYSE:CVNA)? The smart money sentiment can provide an answer to this question.

Is Carvana Co. (NYSE:CVNA) ready to rally soon? Prominent investors were becoming less hopeful. The number of long hedge fund positions were cut by 1 in recent months. Carvana Co. (NYSE:CVNA) was in 63 hedge funds’ portfolios at the end of the second quarter of 2021. The all time high for this statistic is 64. Our calculations also showed that CVNA isn’t among the 30 most popular stocks among hedge funds (click for Q2 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 79 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, the demand for helium is soaring and there is a helium supply shortage, so we are checking out stock pitches like this emerging helium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. With all of this in mind let’s take a glance at the latest hedge fund action regarding Carvana Co. (NYSE:CVNA).

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

At the end of June, a total of 63 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -2% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in CVNA over the last 24 quarters. With the smart money’s capital changing hands, there exists an “upper tier” of notable hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Chase Coleman’s Tiger Global Management LLC has the number one position in Carvana Co. (NYSE:CVNA), worth close to $1.9181 billion, comprising 3.6% of its total 13F portfolio. The second most bullish fund manager is Spruce House Investment Management, led by Zachary Sternberg and Benjamin Stein, holding a $1.1963 billion position; 28.6% of its 13F portfolio is allocated to the stock. Other members of the smart money that are bullish contain Clifford A. Sosin’s CAS Investment Partners, Daniel Sundheim’s D1 Capital Partners and Lone Pine Capital. In terms of the portfolio weights assigned to each position CAS Investment Partners allocated the biggest weight to Carvana Co. (NYSE:CVNA), around 42.43% of its 13F portfolio. Antipodean Advisors is also relatively very bullish on the stock, setting aside 33.66 percent of its 13F equity portfolio to CVNA.

Seeing as Carvana Co. (NYSE:CVNA) has faced bearish sentiment from hedge fund managers, we can see that there is a sect of fund managers that decided to sell off their full holdings last quarter. At the top of the heap, Dan Loeb’s Third Point dropped the largest stake of all the hedgies tracked by Insider Monkey, valued at about $105 million in stock. Daniel S. Och’s fund, OZ Management, also dumped its stock, about $99.7 million worth. These moves are interesting, as total hedge fund interest dropped by 1 funds last quarter.

Let’s go over hedge fund activity in other stocks similar to Carvana Co. (NYSE:CVNA). These stocks are ING Groep N.V. (NYSE:ING), UBS Group AG (NYSE:UBS), Relx PLC (NYSE:RELX), Roblox Corporation (NYSE:RBLX), Canadian Pacific Railway Limited (NYSE:CP), Canadian Imperial Bank of Commerce (NYSE:CM), and Dollar General Corp. (NYSE:DG). This group of stocks’ market caps resemble CVNA’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 23.4 hedge funds with bullish positions and the average amount invested in these stocks was $2019 million. That figure was $8905 million in CVNA’s case. Roblox Corporation (NYSE:RBLX) is the most popular stock in this table. On the other hand Relx PLC (NYSE:RELX) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Carvana Co. (NYSE:CVNA) is more popular among hedge funds. Our overall hedge fund sentiment score for CVNA is 83.5. 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. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 26.3% in 2021 through October 29th and still beat the market by 2.3 percentage points. Unfortunately CVNA wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on CVNA were disappointed as the stock returned 0.5% since the end of the second quarter (through 10/29) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market since 2019.

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

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