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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 Advance Auto Parts, Inc. (NYSE:AAP).
Is AAP a good stock to buy now? Advance Auto Parts, Inc. (NYSE:AAP) has experienced a decrease in support from the world's most elite money managers recently. Advance Auto Parts, Inc. (NYSE:AAP) was in 42 hedge funds' portfolios at the end of September. The all time high for this statistic is 62. Our calculations also showed that AAP isn't among the 30 most popular stocks among hedge funds (click for Q3 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.
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 66 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 13% through November 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Daniel Sundheim of D1 Capital Partners
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, the House passed a landmark bill decriminalizing marijuana. So, we are checking out this under the radar cannabis stock right now. We go through lists like the 15 best blue chip stocks to buy 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. Now we're going to take a gander at the key hedge fund action encompassing Advance Auto Parts, Inc. (NYSE:AAP).
Do Hedge Funds Think AAP Is A Good Stock To Buy Now?
At third quarter's end, a total of 42 of the hedge funds tracked by Insider Monkey were long this stock, a change of -11% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards AAP over the last 21 quarters. With the smart money's sentiment swirling, there exists a select group of notable hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).
Among these funds, Melvin Capital Management held the most valuable stake in Advance Auto Parts, Inc. (NYSE:AAP), which was worth $571.9 million at the end of the third quarter. On the second spot was Starboard Value LP which amassed $245.1 million worth of shares. D1 Capital Partners, Scopus Asset Management, and Melvin 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 Starboard Value LP allocated the biggest weight to Advance Auto Parts, Inc. (NYSE:AAP), around 7.27% of its 13F portfolio. Lionstone Capital Management is also relatively very bullish on the stock, designating 4.5 percent of its 13F equity portfolio to AAP.
Judging by the fact that Advance Auto Parts, Inc. (NYSE:AAP) has witnessed bearish sentiment from the aggregate hedge fund industry, logic holds that there is a sect of money managers that elected to cut their entire stakes by the end of the third quarter. It's worth mentioning that Dmitry Balyasny's Balyasny Asset Management dumped the biggest position of all the hedgies watched by Insider Monkey, comprising an estimated $40.8 million in stock. Anthony Joseph Vaccarino's fund, North Fourth Asset Management, also cut its stock, about $8.4 million worth. These transactions are important to note, as aggregate hedge fund interest was cut by 5 funds by the end of the third quarter.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Advance Auto Parts, Inc. (NYSE:AAP) but similarly valued. These stocks are Halliburton Company (NYSE:HAL), Eastman Chemical Company (NYSE:EMN), Vipshop Holdings Limited (NYSE:VIPS), James Hardie Industries plc (NYSE:JHX), CNH Industrial NV (NYSE:CNHI), CenterPoint Energy, Inc. (NYSE:CNP), and DaVita Inc (NYSE:DVA). All of these stocks' market caps are closest to AAP's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HAL,32,676988,2 EMN,27,183978,0 VIPS,24,268749,-4 JHX,4,11513,-1 CNHI,18,289206,1 CNP,20,413380,-10 DVA,34,3543745,-1 Average,22.7,769651,-1.9 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 22.7 hedge funds with bullish positions and the average amount invested in these stocks was $770 million. That figure was $1619 million in AAP's case. DaVita Inc (NYSE:DVA) is the most popular stock in this table. On the other hand James Hardie Industries plc (NYSE:JHX) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Advance Auto Parts, Inc. (NYSE:AAP) is more popular among hedge funds. Our overall hedge fund sentiment score for AAP is 70.3. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 32.9% in 2020 through December 8th and still beat the market by 16.2 percentage points. Unfortunately AAP wasn't nearly as popular as these 20 stocks and hedge funds that were betting on AAP were disappointed as the stock returned -0.5% since the end of the third quarter (through 12/8) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.