Were Hedge Funds Right About Flocking Into KAR Auction Services Inc (KAR) ?

Like everyone else, elite investors make mistakes. Some of their top consensus picks, such as Amazon, Facebook and Alibaba, have not done well in Q4 due to various reasons. Nevertheless, the data show elite investors’ consensus picks have done well on average over the long-term. The top 20 stocks among hedge funds beat the S&P 500 Index ETF by more than 6 percentage points so far this year. Because their consensus picks have done well, we pay attention to what elite funds think before doing extensive research on a stock. In this article, we take a closer look at KAR Auction Services Inc (NYSE:KAR) from the perspective of those elite funds.

Is KAR Auction Services Inc (NYSE:KAR) the right pick for your portfolio? Money managers are becoming more confident. The number of long hedge fund bets moved up by 8 recently. Our calculations also showed that KAR isn’t among the 30 most popular stocks among hedge funds.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 market by 40 percentage points since May 2014 through May 30, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

Jeremy Mindich - Scopia Capital

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

What does the smart money think about KAR Auction Services Inc (NYSE:KAR)?

At the end of the first quarter, a total of 42 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 24% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in KAR over the last 15 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.


More specifically, D E Shaw was the largest shareholder of KAR Auction Services Inc (NYSE:KAR), with a stake worth $166.2 million reported as of the end of March. Trailing D E Shaw was Gates Capital Management, which amassed a stake valued at $152.7 million. Cardinal Capital, Starboard Value LP, and HG Vora Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.

As one would reasonably expect, key hedge funds were breaking ground themselves. Starboard Value LP, managed by Jeffrey Smith, assembled the most outsized position in KAR Auction Services Inc (NYSE:KAR). Starboard Value LP had $131.6 million invested in the company at the end of the quarter. Parag Vora’s HG Vora Capital Management also made a $102.6 million investment in the stock during the quarter. The following funds were also among the new KAR investors: Matt Sirovich and Jeremy Mindich’s Scopia Capital, Israel Englander’s Millennium Management, and John Brennan’s Sirios Capital Management.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as KAR Auction Services Inc (NYSE:KAR) but similarly valued. These stocks are YY Inc (NASDAQ:YY), WABCO Holdings Inc. (NYSE:WBC), World Wrestling Entertainment, Inc. (NYSE:WWE), and Grupo Televisa SAB (NYSE:TV). This group of stocks’ market caps match KAR’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
YY 20 129700 -4
WBC 36 801213 22
WWE 47 1022250 13
TV 16 889924 2
Average 29.75 710772 8.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.75 hedge funds with bullish positions and the average amount invested in these stocks was $711 million. That figure was $1234 million in KAR’s case. World Wrestling Entertainment, Inc. (NYSE:WWE) is the most popular stock in this table. On the other hand Grupo Televisa SAB (NYSE:TV) is the least popular one with only 16 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. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on KAR as the stock returned 11.7% during the same period and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.

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