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How Did Advance Auto Parts, Inc. (AAP) Compare Against Hedge Fund Darlings in 2019?

Abigail Fisher

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 complex research processes 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. Nevertheless, it is also possible to find underpriced large-cap stocks by following the hedge funds' moves. In this article, we look at what those funds think of Advance Auto Parts, Inc. (NYSE:AAP) based on that data.

Advance Auto Parts, Inc. (NYSE:AAP) investors should pay attention to a decrease in activity from the world's largest hedge funds lately. 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 holdings 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 at the end of this article for Q2 rankings).

If you'd ask most shareholders, hedge funds are seen as slow, old financial vehicles of yesteryear. While there are greater than 8000 funds in operation at present, We look at the moguls of this club, about 750 funds. It is estimated that this group of investors oversee bulk of all hedge funds' total capital, and by keeping track of their unrivaled equity investments, Insider Monkey has figured out numerous investment strategies that have historically defeated the broader indices. Insider Monkey's flagship short hedge fund strategy outpaced the S&P 500 short ETFs by around 20 percentage points per year 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_670980" align="aligncenter" width="600"] Gabriel Plotkin of Melvin Capital Management[/caption]

Gabriel Plotkin Melvin Capital Management

We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. With all of this in mind let's review the new hedge fund action surrounding Advance Auto Parts, Inc. (NYSE:AAP).

What have hedge funds been doing with Advance Auto Parts, Inc. (NYSE:AAP)?

Heading into the fourth quarter of 2019, a total of 36 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -3% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in AAP over the last 17 quarters. With hedgies' capital changing hands, there exists a few notable hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

Among these funds, Starboard Value LP held the most valuable stake in Advance Auto Parts, Inc. (NYSE:AAP), which was worth $425.6 million at the end of the third quarter. On the second spot was Melvin Capital Management which amassed $323.4 million worth of shares. 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 13F portfolio. Lionstone Capital Management is also relatively very bullish on the stock, earmarking 13.16 percent of its 13F equity portfolio to AAP.

Seeing as Advance Auto Parts, Inc. (NYSE:AAP) has experienced declining sentiment from the entirety of the hedge funds we track, logic holds that there was a specific group of funds who were dropping their positions entirely last quarter. At the top of the heap, Seth Wunder's Black-and-White Capital said goodbye to the biggest position of the "upper crust" of funds watched by Insider Monkey, totaling close to $27.7 million in stock, and Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital was right behind this move, as the fund said goodbye to about $20.8 million worth. These transactions are important to note, as aggregate hedge fund interest dropped by 1 funds last quarter.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Advance Auto Parts, Inc. (NYSE:AAP) but similarly valued. We will take a look at Okta, Inc. (NASDAQ:OKTA), Godaddy Inc (NYSE:GDDY), iQIYI, Inc. (NASDAQ:IQ), and Wheaton Precious Metals Corp. (NYSE:WPM). This group of stocks' market caps are similar to AAP's market cap.

[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 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 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 1.7% in 2019 (as of 12/23) and trailed 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 65 percent of these stocks already outperformed the market in 2019. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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