Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts, usually don't make them change their opinion towards a company. This time it may be different. During the fourth quarter of 2018 we observed increased volatility and small-cap stocks underperformed the market. Things completely reversed during the first quarter. Hedge fund investor letters indicated that they are cutting their overall exposure, closing out some position and doubling down on others. Let’s take a look at the hedge fund sentiment towards Advance Auto Parts, Inc. (NYSE:AAP) to find out whether it was one of their high conviction long-term ideas.
Advance Auto Parts, Inc. (NYSE:AAP) has seen a decrease in activity from the world's largest hedge funds lately. AAP was in 47 hedge funds' portfolios at the end of March. There were 51 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.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 30.9% through May 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Let's take a peek at the latest hedge fund action surrounding Advance Auto Parts, Inc. (NYSE:AAP).
How are hedge funds trading Advance Auto Parts, Inc. (NYSE:AAP)?
At the end of the first quarter, a total of 47 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -8% from one quarter earlier. On the other hand, there were a total of 29 hedge funds with a bullish position in AAP a year ago. With hedgies' capital changing hands, there exists a select group of noteworthy hedge fund managers who were upping their stakes significantly (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 $541.4 million at the end of the first quarter. On the second spot was SRS Investment Management which amassed $185.6 million worth of shares. Moreover, Point72 Asset Management, Melvin Capital Management, and Citadel Investment Group were also bullish on Advance Auto Parts, Inc. (NYSE:AAP), allocating a large percentage of their portfolios to this stock.
Due to the fact that Advance Auto Parts, Inc. (NYSE:AAP) has witnessed falling interest from the entirety of the hedge funds we track, it's safe to say that there lies a certain "tier" of hedgies that slashed their full holdings in the third quarter. Intriguingly, David Costen Haley's HBK Investments said goodbye to the largest stake of all the hedgies tracked by Insider Monkey, valued at close to $20.5 million in stock. Andrew Feldstein and Stephen Siderow's fund, Blue Mountain Capital, also cut its stock, about $19 million worth. These transactions are intriguing to say the least, as total hedge fund interest dropped by 4 funds in the third quarter.
Let's now take a look at hedge fund activity in other stocks similar to Advance Auto Parts, Inc. (NYSE:AAP). We will take a look at Universal Health Services, Inc. (NYSE:UHS), Quest Diagnostics Incorporated (NYSE:DGX), Atmos Energy Corporation (NYSE:ATO), and Broadridge Financial Solutions, Inc. (NYSE:BR). This group of stocks' market valuations are similar to AAP's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position UHS,29,761401,1 DGX,22,303617,-4 ATO,20,292201,-5 BR,26,396752,4 Average,24.25,438493,-1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 24.25 hedge funds with bullish positions and the average amount invested in these stocks was $438 million. That figure was $2297 million in AAP's case. Universal Health Services, Inc. (NYSE:UHS) is the most popular stock in this table. On the other hand Atmos Energy Corporation (NYSE:ATO) is the least popular one with only 20 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 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately AAP wasn't nearly as popular as these 20 stocks and hedge funds that were betting on AAP were disappointed as the stock returned -6.5% during the same period 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 13 of these stocks already outperformed the market in Q2.
Disclosure: None. This article was originally published at Insider Monkey.