It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren't usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index's returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you'd fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 8 percentage points so far in 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That's why we are going to go over recent hedge fund activity in Advance Auto Parts, Inc. (NYSE:AAP).
Advance Auto Parts, Inc. (NYSE:AAP) has seen a decrease in activity from the world's largest hedge funds recently. AAP was in 36 hedge funds' portfolios at the end of the third quarter of 2019. There were 37 hedge funds in our database with AAP positions at the end of the previous quarter. 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 below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
In the eyes of most investors, hedge funds are seen as unimportant, old financial tools of yesteryear. While there are more than 8000 funds in operation at the moment, Our researchers look at the moguls of this club, about 750 funds. It is estimated that this group of investors direct most of the hedge fund industry's total capital, and by keeping an eye on their top picks, Insider Monkey has figured out numerous investment strategies that have historically beaten Mr. Market. Insider Monkey's flagship short hedge fund strategy beat the S&P 500 short ETFs by around 20 percentage points per annum since its inception in May 2014. Our portfolio of short stocks lost 27.8% since February 2017 (through November 21st) even though the market was up more than 39% during the same period. We just shared a list of 7 short targets in our latest quarterly update .
[caption id="attachment_340081" align="aligncenter" width="450"] Phill Gross of Adage Capital Management[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. We're going to take a gander at the key hedge fund action encompassing Advance Auto Parts, Inc. (NYSE:AAP).
What does smart money think about Advance Auto Parts, Inc. (NYSE:AAP)?
At Q3's end, a total of 36 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -3% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards AAP over the last 17 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Starboard Value LP was the largest shareholder of Advance Auto Parts, Inc. (NYSE:AAP), with a stake worth $425.6 million reported as of the end of September. Trailing Starboard Value LP was Melvin Capital Management, which amassed a stake valued at $323.4 million. Adage Capital Management, D E Shaw, and SRS Investment 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 14.2% of its portfolio. Lionstone Capital Management is also relatively very bullish on the stock, designating 13.16 percent of its 13F equity portfolio to AAP.
Due to the fact that Advance Auto Parts, Inc. (NYSE:AAP) has faced falling interest from the aggregate hedge fund industry, it's easy to see that there was a specific group of fund managers that decided to sell off their positions entirely heading into Q4. At the top of the heap, Seth Wunder's Black-and-White Capital dumped the biggest investment of all the hedgies tracked by Insider Monkey, comprising an estimated $27.7 million in stock. Peter Rathjens, Bruce Clarke and John Campbell's fund, Arrowstreet Capital, also dumped its stock, about $20.8 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest fell by 1 funds heading into Q4.
Let's check out hedge fund activity in other stocks similar to Advance Auto Parts, Inc. (NYSE:AAP). These stocks are Okta, Inc. (NASDAQ:OKTA), Godaddy Inc (NYSE:GDDY), iQIYI, Inc. (NASDAQ:IQ), and Wheaton Precious Metals Corp. (NYSE:WPM). This group of stocks' market valuations are closest to AAP's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position OKTA,49,1120794,10 GDDY,48,2545499,4 IQ,22,966821,0 WPM,27,326903,8 Average,36.5,1240004,5.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 36.5 hedge funds with bullish positions and the average amount invested in these stocks was $1240 million. That figure was $1497 million in AAP's case. Okta, Inc. (NASDAQ:OKTA) is the most popular stock in this table. On the other hand iQIYI, Inc. (NASDAQ:IQ) is the least popular one with only 22 bullish hedge fund positions. Advance Auto Parts, Inc. (NYSE:AAP) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately AAP wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); AAP investors were disappointed as the stock returned -5% during the first two months of the fourth quarter 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.