Were Hedge Funds Right About Carvana Co. (CVNA)?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtCarvana Co. (NYSE:CVNA) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Carvana Co. (NYSE:CVNA) shareholders have witnessed a decrease in hedge fund sentiment of late. CVNA was in 52 hedge funds’ portfolios at the end of March. There were 53 hedge funds in our database with CVNA holdings 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 lot of formulas shareholders put to use to size up publicly traded companies. A pair of the most innovative formulas are hedge fund and insider trading sentiment. Our experts have shown that, historically, those who follow the best picks of the elite investment managers can outperform their index-focused peers by a healthy amount (see the details here).

Ben Stein Spruce House Investment Management

Ben Stein of Spruce House Investment Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to review the recent hedge fund action surrounding Carvana Co. (NYSE:CVNA).

How have hedgies been trading 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 fourth quarter of 2019. On the other hand, there were a total of 41 hedge funds with a bullish position in CVNA a year ago. With the smart money’s sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).

The largest stake in Carvana Co. (NYSE:CVNA) was held by Tiger Global Management LLC, which reported holding $331.3 million worth of stock at the end of September. It was followed by Lone Pine Capital with a $281 million position. Other investors bullish on the company included Spruce House Investment Management, CAS Investment Partners, and 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, setting aside 19.83 percent of its 13F equity portfolio to CVNA.

Seeing as Carvana Co. (NYSE:CVNA) has experienced declining sentiment from the aggregate hedge fund industry, it’s safe to say that there is a sect of hedge funds who sold off their entire stakes in the first quarter. At the top of the heap, Karthik Sarma’s SRS Investment Management sold off the biggest position of the “upper crust” of funds followed by Insider Monkey, comprising an estimated $58 million in stock. Bruce Emery’s fund, Greenvale Capital, also dropped its stock, about $45.1 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 1 funds in the first quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Carvana Co. (NYSE:CVNA) but similarly valued. 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 similar 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 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on CVNA as the stock returned 118.2% in Q2 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.

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