The market has been volatile in the last few months as the Federal Reserve continued its rate cuts and uncertainty looms over trade negotiations with China. Small cap stocks have been hit hard as a result, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 10 percentage points over the last 12 months. SEC filings and hedge fund investor letters indicate that the smart money seems to be paring back their overall long exposure since summer months, though some funds increased their exposure dramatically at the end of Q2 and the beginning of Q3. In this article, we analyze what the smart money thinks of Advance Auto Parts, Inc. (NYSE:AAP) and find out how it is affected by hedge funds' moves.
Is Advance Auto Parts, Inc. (NYSE:AAP) going to take off soon? Prominent investors are getting less optimistic. The number of bullish hedge fund bets shrunk by 10 recently. Our calculations also showed that AAP isn't among the 30 most popular stocks among hedge funds (view the video below). AAP was in 37 hedge funds' portfolios at the end of June. There were 47 hedge funds in our database with AAP positions at the end of the previous quarter. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 40 percentage points since May 2014 through May 30, 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.
Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's take a gander at the latest hedge fund action encompassing Advance Auto Parts, Inc. (NYSE:AAP).
What does smart money think about Advance Auto Parts, Inc. (NYSE:AAP)?
At the end of the second quarter, a total of 37 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -21% from the previous quarter. The graph below displays the number of hedge funds with bullish position in AAP over the last 16 quarters. So, let's review 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 $489.4 million reported as of the end of March. Trailing Starboard Value LP was Melvin Capital Management, which amassed a stake valued at $247.3 million. D E Shaw, Adage Capital Management, and SRS Investment Management were also very fond of the stock, giving the stock large weights in their portfolios.
Since Advance Auto Parts, Inc. (NYSE:AAP) has faced falling interest from hedge fund managers, we can see that there is a sect of money managers that elected to cut their positions entirely by the end of the second quarter. Interestingly, Ken Griffin's Citadel Investment Group dropped the largest investment of the 750 funds watched by Insider Monkey, totaling close to $143.5 million in stock, and Dmitry Balyasny's Balyasny Asset Management was right behind this move, as the fund said goodbye to about $86.4 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest fell by 10 funds by the end of the second quarter.
Let's now review hedge fund activity in other stocks similar to Advance Auto Parts, Inc. (NYSE:AAP). These stocks are Devon Energy Corp (NYSE:DVN), Zebra Technologies Corporation (NASDAQ:ZBRA), C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW), and Regency Centers Corp (NASDAQ:REG). This group of stocks' market valuations match AAP's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DVN,36,1412120,-4 ZBRA,20,635734,-15 CHRW,20,351182,-10 REG,12,319525,-5 Average,22,679640,-8.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 22 hedge funds with bullish positions and the average amount invested in these stocks was $680 million. That figure was $1458 million in AAP's case. Devon Energy Corp (NYSE:DVN) is the most popular stock in this table. On the other hand Regency Centers Corp (NASDAQ:REG) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Advance Auto Parts, Inc. (NYSE:AAP) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on AAP as the stock returned 7.3% during Q3 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.
Disclosure: None. This article was originally published at Insider Monkey.