Hedge Funds Are Betting On CarGurus, Inc. (CARG)

Reymerlyn Martin

Updated Tue, Dec 18, 2018, 8:20 PM

CarGurus, Inc. (NASDAQ:CARG) investors should pay attention to an increase in support from the world's most elite money managers of late. CARG was in 17 hedge funds' portfolios at the end of the third quarter of 2018. There were 11 hedge funds in our database with CARG positions at the end of the previous quarter. Our calculations also showed that CARG 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 18 percentage points since May 2014 through December 3, 2018 (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.

We're going to take a look at the latest hedge fund action regarding CarGurus, Inc. (NASDAQ:CARG).

How have hedgies been trading CarGurus, Inc. (NASDAQ:CARG)?

At Q3's end, a total of 17 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 55% from the second quarter of 2018. By comparison, 10 hedge funds held shares or bullish call options in CARG heading into this year. With the smart money's sentiment swirling, there exists a select group of key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).

More specifically, Matrix Capital Management was the largest shareholder of CarGurus, Inc. (NASDAQ:CARG), with a stake worth $267.4 million reported as of the end of September. Trailing Matrix Capital Management was Hound Partners, which amassed a stake valued at $190.8 million. Cat Rock Capital, Two Sigma Advisors, and Renaissance Technologies were also very fond of the stock, giving the stock large weights in their portfolios.

With a general bullishness amongst the heavyweights, specific money managers were breaking ground themselves. Hound Partners, managed by Jonathan Auerbach, initiated the most valuable position in CarGurus, Inc. (NASDAQ:CARG). Hound Partners had $190.8 million invested in the company at the end of the quarter. Jim Simons's Renaissance Technologies also made a $33.5 million investment in the stock during the quarter. The following funds were also among the new CARG investors: James Crichton's Hitchwood Capital Management, Richard Driehaus's Driehaus Capital, and David Costen Haley's HBK Investments.

Let's go over hedge fund activity in other stocks - not necessarily in the same industry as CarGurus, Inc. (NASDAQ:CARG) but similarly valued. These stocks are Lincoln Electric Holdings, Inc. (NASDAQ:LECO), YPF Sociedad Anonima (NYSE:YPF), Integrated Device Technology, Inc. (NASDAQ:IDTI), and JetBlue Airways Corporation (NASDAQ:JBLU). This group of stocks' market valuations are closest to CARG's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LECO,19,365551,0 YPF,17,241797,-7 IDTI,35,838486,19 JBLU,30,560163,3 Average,25.25,501499,3.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.25 hedge funds with bullish positions and the average amount invested in these stocks was $501 million. That figure was $792 million in CARG's case. Integrated Device Technology, Inc. (NASDAQ:IDTI) is the most popular stock in this table. On the other hand YPF Sociedad Anonima (NYSE:YPF) is the least popular one with only 17 bullish hedge fund positions. Compared to these stocks CarGurus, Inc. (NASDAQ:CARG) is even less popular than YPF. Considering that hedge funds aren't fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn't behind this stock. This isn't necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.

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

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