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AutoZone, Inc. (AZO): Are Hedge Funds Right About This Stock?

Debasis Saha

The financial regulations require hedge funds and wealthy investors that exceeded the $100 million equity holdings threshold to file a report that shows their positions at the end of every quarter. Even though it isn't the intention, these filings to a certain extent level the playing field for ordinary investors. The latest round of 13F filings disclosed the funds' positions on March 31st, about a week after the S&P 500 Index bottomed. We at Insider Monkey have made an extensive database of more than 821 of those established hedge funds and famous value investors' filings. In this article, we analyze how these elite funds and prominent investors traded AutoZone, Inc. (NYSE:AZO) based on those filings.

Is AutoZone, Inc. (NYSE:AZO) a good investment now? Hedge funds are taking a bullish view. The number of bullish hedge fund bets rose by 5 in recent months. Our calculations also showed that AZO isn't among the 30 most popular stocks among hedge funds (click for Q1 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.

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 S&P 500 ETFs by more than 44 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 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 stocks that are in our short portfolio.

[caption id="attachment_258236" align="aligncenter" width="400"] Ken Griffin of Citadel Investment Group[/caption]

Ken Griffin

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, we are still not out of the woods in terms of the coronavirus pandemic. So, we checked out this successful trader’s “corona catalyst plays“. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let's go over the fresh hedge fund action surrounding AutoZone, Inc. (NYSE:AZO).

What have hedge funds been doing with AutoZone, Inc. (NYSE:AZO)?

Heading into the second quarter of 2020, a total of 45 of the hedge funds tracked by Insider Monkey were long this stock, a change of 13% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards AZO over the last 18 quarters. With hedge funds' capital changing hands, there exists a few key hedge fund managers who were upping their holdings considerably (or already accumulated large positions).

Is AZO A Good Stock To Buy?

Among these funds, Melvin Capital Management held the most valuable stake in AutoZone, Inc. (NYSE:AZO), which was worth $532.3 million at the end of the third quarter. On the second spot was Iridian Asset Management which amassed $166.1 million worth of shares. D1 Capital Partners, Melvin Capital Management, and Citadel Investment Group 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 BlueDrive Global Investors allocated the biggest weight to AutoZone, Inc. (NYSE:AZO), around 8.02% of its 13F portfolio. Melvin Capital Management is also relatively very bullish on the stock, setting aside 4.24 percent of its 13F equity portfolio to AZO.

With a general bullishness amongst the heavyweights, some big names have jumped into AutoZone, Inc. (NYSE:AZO) headfirst. Melvin Capital Management, managed by Gabriel Plotkin, assembled the most valuable position in AutoZone, Inc. (NYSE:AZO). Melvin Capital Management had $532.3 million invested in the company at the end of the quarter. Daniel Sundheim's D1 Capital Partners also made a $142.1 million investment in the stock during the quarter. The following funds were also among the new AZO investors: Jack Woodruff's Candlestick Capital Management, Louis Bacon's Moore Global Investments, and Oscar Hattink's BlueDrive Global Investors.

Let's check out hedge fund activity in other stocks similar to AutoZone, Inc. (NYSE:AZO). These stocks are PPG Industries, Inc. (NYSE:PPG), Credit Suisse Group AG (NYSE:CS), Fresenius Medical Care AG & Co. (NYSE:FMS), and Trane Technologies plc (NYSE:TT). This group of stocks' market values are similar to AZO's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PPG,35,393229,0 CS,11,134498,1 FMS,10,16944,-1 TT,36,615498,36 Average,23,290042,9 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 23 hedge funds with bullish positions and the average amount invested in these stocks was $290 million. That figure was $1355 million in AZO's case. Trane Technologies plc (NYSE:TT) is the most popular stock in this table. On the other hand Fresenius Medical Care AG & Co. (NYSE:FMS) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks AutoZone, Inc. (NYSE:AZO) is more popular among hedge funds. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks returned 7.9% in 2020 through May 22nd but still managed to beat the market by 15.6 percentage points. Hedge funds were also right about betting on AZO as the stock returned 32.7% so far in Q2 (through May 22nd) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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