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Were Hedge Funds Right About Piling Into CarMax Inc (KMX)?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding CarMax Inc (NYSE:KMX) and determine whether hedge funds had an edge regarding this stock.

CarMax Inc (NYSE:KMX) investors should be aware of a decrease in hedge fund sentiment lately. KMX was in 37 hedge funds’ portfolios at the end of the first quarter of 2020. There were 50 hedge funds in our database with KMX positions at the end of the previous quarter. Our calculations also showed that KMX 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 large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Tom Gayner

Tom Gayner of Markel Gayner Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. Now let’s take a glance at the key hedge fund action encompassing CarMax Inc (NYSE:KMX).

What does smart money think about CarMax Inc (NYSE:KMX)?

At the end of the first quarter, a total of 37 of the hedge funds tracked by Insider Monkey were long this stock, a change of -26% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards KMX over the last 18 quarters. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Akre Capital Management held the most valuable stake in CarMax Inc (NYSE:KMX), which was worth $440.9 million at the end of the third quarter. On the second spot was Markel Gayner Asset Management which amassed $264.5 million worth of shares. Giverny Capital, Southpoint Capital Advisors, and Wallace R. Weitz & Co. 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 Silver Heights Capital Management allocated the biggest weight to CarMax Inc (NYSE:KMX), around 18.1% of its 13F portfolio. LFL Advisers is also relatively very bullish on the stock, earmarking 15.24 percent of its 13F equity portfolio to KMX.

Because CarMax Inc (NYSE:KMX) has witnessed falling interest from the smart money, it’s easy to see that there were a few money managers that slashed their entire stakes in the first quarter. Intriguingly, Andrew Immerman and Jeremy Schiffman’s Palestra Capital Management cut the largest investment of the 750 funds followed by Insider Monkey, valued at about $125.5 million in stock, and James Parsons’s Junto Capital Management was right behind this move, as the fund cut about $31.2 million worth. These transactions are important to note, as aggregate hedge fund interest was cut by 13 funds in the first quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as CarMax Inc (NYSE:KMX) but similarly valued. We will take a look at Raymond James Financial, Inc. (NYSE:RJF), The Trade Desk, Inc. (NASDAQ:TTD), Celanese Corporation (NYSE:CE), and Black Knight, Inc. (NYSE:BKI). This group of stocks’ market caps are closest to KMX’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
RJF 31 441370 3
TTD 25 393525 1
CE 29 509076 -2
BKI 32 372352 1
Average 29.25 429081 0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.25 hedge funds with bullish positions and the average amount invested in these stocks was $429 million. That figure was $1084 million in KMX’s case. Black Knight, Inc. (NYSE:BKI) is the most popular stock in this table. On the other hand The Trade Desk, Inc. (NASDAQ:TTD) is the least popular one with only 25 bullish hedge fund positions. Compared to these stocks CarMax Inc (NYSE:KMX) 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 KMX as the stock returned 66.4% 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.