Hedge funds and other investment firms that we track manage billions of dollars of their wealthy clients' money, and needless to say, they are painstakingly thorough when analyzing where to invest this money, as their own wealth also depends on it. Regardless of the various methods used by elite investors like David Tepper and David Abrams, the resources they expend are second-to-none. This is especially valuable when it comes to small-cap stocks, which is where they generate their strongest outperformance, as their resources give them a huge edge when it comes to studying these stocks compared to the average investor, which is why we intently follow their activity in the small-cap space. Nevertheless, it is also possible to identify cheap large cap stocks by following the footsteps of best performing hedge funds. In this article we are going to take a look at smart money sentiment towards O'Reilly Automotive Inc (NASDAQ:ORLY).
Is O'Reilly Automotive Inc (NASDAQ:ORLY) ready to rally soon? Investors who are in the know are taking a pessimistic view. The number of long hedge fund positions went down by 8 lately. Our calculations also showed that ORLY 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). ORLY was in 42 hedge funds' portfolios at the end of the third quarter of 2019. There were 50 hedge funds in our database with ORLY holdings at the end of the previous quarter.
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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_338491" align="alignnone" width="600"] David Abrams of Abrams Capital Management[/caption]
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. Keeping this in mind we're going to view the key hedge fund action surrounding O'Reilly Automotive Inc (NASDAQ:ORLY).
What does smart money think about O'Reilly Automotive Inc (NASDAQ:ORLY)?
At the end of the third quarter, a total of 42 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -16% from the second quarter of 2019. By comparison, 43 hedge funds held shares or bullish call options in ORLY a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
The largest stake in O'Reilly Automotive Inc (NASDAQ:ORLY) was held by Akre Capital Management, which reported holding $752 million worth of stock at the end of September. It was followed by Abrams Capital Management with a $212.8 million position. Other investors bullish on the company included Diamond Hill Capital, Citadel Investment Group, and AQR Capital Management. In terms of the portfolio weights assigned to each position Akre Capital Management allocated the biggest weight to O'Reilly Automotive Inc (NASDAQ:ORLY), around 7.41% of its 13F portfolio. Abrams Capital Management is also relatively very bullish on the stock, dishing out 5.96 percent of its 13F equity portfolio to ORLY.
Judging by the fact that O'Reilly Automotive Inc (NASDAQ:ORLY) has experienced falling interest from the entirety of the hedge funds we track, logic holds that there was a specific group of fund managers that slashed their full holdings by the end of the third quarter. It's worth mentioning that John Overdeck and David Siegel's Two Sigma Advisors cut the largest stake of all the hedgies followed by Insider Monkey, valued at an estimated $69.3 million in stock, and Greg Poole's Echo Street Capital Management was right behind this move, as the fund said goodbye to about $33.3 million worth. These transactions are important to note, as aggregate hedge fund interest was cut by 8 funds by the end of the third quarter.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as O'Reilly Automotive Inc (NASDAQ:ORLY) but similarly valued. We will take a look at Regeneron Pharmaceuticals Inc (NASDAQ:REGN), ONEOK, Inc. (NYSE:OKE), NXP Semiconductors NV (NASDAQ:NXPI), and Atlassian Corporation Plc (NASDAQ:TEAM). This group of stocks' market valuations are similar to ORLY's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position REGN,33,869893,-4 OKE,23,308569,2 NXPI,59,3380862,-1 TEAM,46,2413494,10 Average,40.25,1743205,1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 40.25 hedge funds with bullish positions and the average amount invested in these stocks was $1743 million. That figure was $2055 million in ORLY's case. NXP Semiconductors NV (NASDAQ:NXPI) is the most popular stock in this table. On the other hand ONEOK, Inc. (NYSE:OKE) is the least popular one with only 23 bullish hedge fund positions. O'Reilly Automotive Inc (NASDAQ:ORLY) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but 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 ORLY wasn't nearly as popular as these 20 stocks and hedge funds that were betting on ORLY were disappointed as the stock returned 27% in 2019 (through December 23rd) and underperformed 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 many of these stocks already outperformed the market so far this year. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.