Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ a complex analysis to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space.
AutoNation, Inc. (NYSE:AN) was in 22 hedge funds' portfolios at the end of December. AN has seen a decrease in hedge fund sentiment in recent months. There were 24 hedge funds in our database with AN holdings at the end of the previous quarter. Our calculations also showed that an isn't among the 30 most popular stocks among hedge funds.
Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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.
Let's review the fresh hedge fund action regarding AutoNation, Inc. (NYSE:AN).
How have hedgies been trading AutoNation, Inc. (NYSE:AN)?
At the end of the fourth quarter, a total of 22 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -8% from the previous quarter. By comparison, 23 hedge funds held shares or bullish call options in AN a year ago. With hedge funds' positions undergoing their usual ebb and flow, there exists an "upper tier" of key hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).
Among these funds, ESL Investments held the most valuable stake in AutoNation, Inc. (NYSE:AN), which was worth $129 million at the end of the third quarter. On the second spot was Arlington Value Capital which amassed $113 million worth of shares. Moreover, Bill & Melinda Gates Foundation Trust, Magnolia Capital Fund, and GAMCO Investors were also bullish on AutoNation, Inc. (NYSE:AN), allocating a large percentage of their portfolios to this stock.
Judging by the fact that AutoNation, Inc. (NYSE:AN) has witnessed declining sentiment from hedge fund managers, logic holds that there is a sect of money managers that elected to cut their entire stakes last quarter. Interestingly, Israel Englander's Millennium Management said goodbye to the biggest position of the 700 funds watched by Insider Monkey, comprising about $11 million in stock, and Michael Moriarty's Teewinot Capital Advisers was right behind this move, as the fund dropped about $5.7 million worth. These moves are intriguing to say the least, as total hedge fund interest fell by 2 funds last quarter.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as AutoNation, Inc. (NYSE:AN) but similarly valued. We will take a look at United Bankshares, Inc. (NASDAQ:UBSI), ACI Worldwide Inc (NASDAQ:ACIW), CoreSite Realty Corp (NYSE:COR), and Plains GP Holdings LP (NYSE:PAGP). This group of stocks' market valuations are closest to AN's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position UBSI,10,27685,3 ACIW,21,272938,6 COR,15,181186,3 PAGP,18,203184,-5 Average,16,171248,1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $171 million. That figure was $428 million in AN's case. ACI Worldwide Inc (NASDAQ:ACIW) is the most popular stock in this table. On the other hand United Bankshares, Inc. (NASDAQ:UBSI) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks AutoNation, Inc. (NYSE:AN) is more popular among hedge funds. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately AN wasn't nearly as popular as these 15 stock and hedge funds that were betting on AN were disappointed as the stock returned 4.6% and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 15 most popular stocks) among hedge funds as 13 of these stocks already outperformed the market this year.
Disclosure: None. This article was originally published at Insider Monkey.