Here’s What Hedge Funds Think About KAR Auction Services Inc (KAR)

Nina Todic

Sat, Apr 20, 2019, 6:16 PM

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards KAR Auction Services Inc (NYSE:KAR).

KAR Auction Services Inc (NYSE:KAR) shareholders have witnessed an increase in enthusiasm from smart money lately. Our calculations also showed that KAR isn't among the 30 most popular stocks among hedge funds.

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 market by 32 percentage points since May 2014 through March 12, 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.

Let's go over the recent hedge fund action encompassing KAR Auction Services Inc (NYSE:KAR).

How are hedge funds trading KAR Auction Services Inc (NYSE:KAR)?

Heading into the first quarter of 2019, a total of 34 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 21% from the previous quarter. The graph below displays the number of hedge funds with bullish position in KAR over the last 14 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).

More specifically, D E Shaw was the largest shareholder of KAR Auction Services Inc (NYSE:KAR), with a stake worth $165.4 million reported as of the end of September. Trailing D E Shaw was Cardinal Capital, which amassed a stake valued at $123.9 million. Gates Capital Management, Two Sigma Advisors, and GAMCO Investors were also very fond of the stock, giving the stock large weights in their portfolios.

Now, key money managers were breaking ground themselves. Crescent Park Management, managed by Eli Cohen, established the most valuable position in KAR Auction Services Inc (NYSE:KAR). Crescent Park Management had $20 million invested in the company at the end of the quarter. Clint Carlson's Carlson Capital also initiated a $14.7 million position during the quarter. The other funds with brand new KAR positions are Dmitry Balyasny's Balyasny Asset Management, Andy Redleaf's Whitebox Advisors, and Paul Marshall and Ian Wace's Marshall Wace LLP.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as KAR Auction Services Inc (NYSE:KAR) but similarly valued. We will take a look at Zillow Group Inc (NASDAQ:Z), Booz Allen Hamilton Holding Corporation (NYSE:BAH), Gerdau SA (NYSE:GGB), and The Madison Square Garden Company (NYSE:MSG). All of these stocks' market caps resemble KAR's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position Z,23,567162,1 BAH,26,215892,4 GGB,12,143342,-3 MSG,46,1733627,6 Average,26.75,665006,2 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.75 hedge funds with bullish positions and the average amount invested in these stocks was $665 million. That figure was $574 million in KAR's case. The Madison Square Garden Company (NYSE:MSG) is the most popular stock in this table. On the other hand Gerdau SA (NYSE:GGB) is the least popular one with only 12 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. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 15 most popular stocks among hedge funds returned 21.3% through April 8th and outperformed the S&P 500 ETF (SPY) by more than 5 percentage points. Unfortunately KAR wasn't in this group. Hedge funds that bet on KAR were disappointed as the stock returned 11.1% and underperformed the market. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 12 of these outperformed the market.

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

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