Were Hedge Funds Right About Crowding Into IAA, Inc. (IAA)?

Our extensive research has shown that imitating the smart money can generate significant returns for retail investors, which is why we track nearly 823 active prominent money managers and analyze their quarterly 13F filings. The stocks that are heavily bought by hedge funds historically outperformed the market, though there is no shortage of high profile failures like hedge funds’ 2018 losses in Facebook and Apple. Let’s take a closer look at what the funds we track think about IAA, Inc. (NYSE:IAA) in this article.

Is IAA, Inc. (NYSE:IAA) a buy right now? Investors who are in the know were taking a bullish view. The number of bullish hedge fund bets moved up by 4 lately. IAA, Inc. (NYSE:IAA) was in 43 hedge funds’ portfolios at the end of June. The all time high for this statistics is 42. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that IAA isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 39 hedge funds in our database with IAA positions at the end of the first quarter.

Video: 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 a select group of hedge fund holdings outperformed the S&P 500 ETFs by 56 percentage points since March 2017 (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 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Keith Meister of Corvex Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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 to get excerpts of these letters in your inbox. Now we’re going to take a look at the fresh hedge fund action surrounding IAA, Inc. (NYSE:IAA).

What does smart money think about IAA, Inc. (NYSE:IAA)?

At Q2’s end, a total of 43 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 10% from the previous quarter. The graph below displays the number of hedge funds with bullish position in IAA over the last 20 quarters. With hedge funds’ sentiment swirling, there exists a few noteworthy hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

More specifically, Third Point was the largest shareholder of IAA, Inc. (NYSE:IAA), with a stake worth $408.3 million reported as of the end of September. Trailing Third Point was Cadian Capital, which amassed a stake valued at $126.4 million. Melvin Capital Management, Southpoint Capital Advisors, and Palestra Capital Management 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 Lionstone Capital Management allocated the biggest weight to IAA, Inc. (NYSE:IAA), around 5.88% of its 13F portfolio. Third Point is also relatively very bullish on the stock, designating 5.59 percent of its 13F equity portfolio to IAA.

Consequently, key hedge funds have been driving this bullishness. Cadian Capital, managed by Eric Bannasch, created the largest position in IAA, Inc. (NYSE:IAA). Cadian Capital had $126.4 million invested in the company at the end of the quarter. John Smith Clark’s Southpoint Capital Advisors also initiated a $82.9 million position during the quarter. The other funds with new positions in the stock are Andrew Immerman and Jeremy Schiffman’s Palestra Capital Management, Keith Meister’s Corvex Capital, and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as IAA, Inc. (NYSE:IAA) but similarly valued. We will take a look at BJ’s Wholesale Club Holdings, Inc. (NYSE:BJ), Acceleron Pharma Inc (NASDAQ:XLRN), East West Bancorp, Inc. (NASDAQ:EWBC), Stericycle Inc (NASDAQ:SRCL), Sealed Air Corporation (NYSE:SEE), Flex Ltd. (NASDAQ:FLEX), and Apache Corporation (NASDAQ:APA). This group of stocks’ market values match IAA’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BJ 31 246030 5
XLRN 48 803006 10
EWBC 23 224008 -2
SRCL 23 699844 3
SEE 28 812312 -1
FLEX 34 941645 10
APA 40 590803 5
Average 32.4 616807 4.3

View table here if you experience formatting issues.

As you can see these stocks had an average of 32.4 hedge funds with bullish positions and the average amount invested in these stocks was $617 million. That figure was $1326 million in IAA’s case. Acceleron Pharma Inc (NASDAQ:XLRN) is the most popular stock in this table. On the other hand East West Bancorp, Inc. (NASDAQ:EWBC) is the least popular one with only 23 bullish hedge fund positions. IAA, Inc. (NYSE:IAA) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for IAA is 79. 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 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 gained 30% in 2020 through October 23rd and still beat the market by 21 percentage points. Hedge funds were also right about betting on IAA as the stock returned 47.2% since the end of Q2 (through 10/23) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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