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AutoZone, Inc. (AZO) Fell Out Of Favor With Hedge Funds?

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Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that's why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can't match. So should one consider investing in AutoZone, Inc. (NYSE:AZO)? The smart money sentiment can provide an answer to this question.

AutoZone, Inc. (NYSE:AZO) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 34 hedge funds' portfolios at the end of the second quarter of 2021. Our calculations also showed that AZO isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings). At the end of this article we will also compare AZO to other stocks including Datadog, Inc. (NASDAQ:DDOG), NatWest Group plc (NYSE:NWG), and Valero Energy Corporation (NYSE:VLO) to get a better sense of its popularity.

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 79 percentage points since March 2017 (see the details here). That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Ryan Tolkin, CIO of Schonfeld Strategic Advisors

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, we like undervalued, EBITDA-positive growth stocks, so we are checking out stock pitches like this emerging biotech stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. Now we're going to go over the new hedge fund action surrounding AutoZone, Inc. (NYSE:AZO).

Do Hedge Funds Think AZO Is A Good Stock To Buy Now?

At second quarter's end, a total of 34 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. The graph below displays the number of hedge funds with bullish position in AZO over the last 24 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is AZO A Good Stock To Buy?
Is AZO A Good Stock To Buy?

More specifically, Arrowstreet Capital was the largest shareholder of AutoZone, Inc. (NYSE:AZO), with a stake worth $180.4 million reported as of the end of June. Trailing Arrowstreet Capital was Citadel Investment Group, which amassed a stake valued at $157.3 million. AQR Capital Management, D E Shaw, and Wallace R. Weitz & Co. 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 12th Street Asset Management allocated the biggest weight to AutoZone, Inc. (NYSE:AZO), around 4.24% of its 13F portfolio. BlueDrive Global Investors is also relatively very bullish on the stock, setting aside 3.01 percent of its 13F equity portfolio to AZO.

Because AutoZone, Inc. (NYSE:AZO) has witnessed a decline in interest from the aggregate hedge fund industry, it's easy to see that there exists a select few fund managers that slashed their positions entirely by the end of the second quarter. It's worth mentioning that Patrick Degorce's Theleme Partners said goodbye to the biggest investment of the 750 funds followed by Insider Monkey, worth close to $189.5 million in stock. Renaissance Technologies, also cut its stock, about $13.2 million worth. These bearish behaviors are interesting, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as AutoZone, Inc. (NYSE:AZO) but similarly valued. These stocks are Datadog, Inc. (NASDAQ:DDOG), NatWest Group plc (NYSE:NWG), Valero Energy Corporation (NYSE:VLO), Liberty Broadband Corp (NASDAQ:LBRDA), BeiGene, Ltd. (NASDAQ:BGNE), Skyworks Solutions Inc (NASDAQ:SWKS), and Li Auto Inc. (NASDAQ:LI). This group of stocks' market caps resemble AZO's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DDOG,56,3235244,12 NWG,5,6649,-1 VLO,38,259399,-3 LBRDA,28,904867,5 BGNE,21,6192135,2 SWKS,37,924180,4 LI,20,457452,2 Average,29.3,1711418,3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.3 hedge funds with bullish positions and the average amount invested in these stocks was $1711 million. That figure was $546 million in AZO's case. Datadog, Inc. (NASDAQ:DDOG) is the most popular stock in this table. On the other hand NatWest Group plc (NYSE:NWG) is the least popular one with only 5 bullish hedge fund positions. AutoZone, Inc. (NYSE:AZO) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for AZO is 52. 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 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 21.8% in 2021 through October 11th and still beat the market by 4.4 percentage points. Hedge funds were also right about betting on AZO as the stock returned 12.2% since the end of Q2 (through 10/11) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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