Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we publish an article with the title "Recession is Imminent: We Need A Travel Ban NOW". We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president.
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. Insider Monkey finished processing 835 13F filings submitted by hedge funds and prominent investors. These filings show these funds' portfolio positions as of December 31st, 2019. What do these smart investors think about Advance Auto Parts, Inc. (NYSE:AAP)?
Is Advance Auto Parts, Inc. (NYSE:AAP) the right pick for your portfolio? Hedge funds are in an optimistic mood. The number of bullish hedge fund bets moved up by 1 in recent months. Our calculations also showed that AAP isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
In the 21st century investor’s toolkit there are a multitude of indicators market participants employ to assess stocks. A pair of the less utilized indicators are hedge fund and insider trading sentiment. Our researchers have shown that, historically, those who follow the best picks of the elite hedge fund managers can outpace the market by a healthy margin (see the details here).
[caption id="attachment_256989" align="aligncenter" width="400"] Dmitry Balyasny of Balyasny Asset Managemnet[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. In January, we recommended a long position in one of the most shorted stocks in the market, and that stock returned more than 50% despite the large losses in the market since our recommendation. Now we're going to take a look at the fresh hedge fund action surrounding Advance Auto Parts, Inc. (NYSE:AAP).
How have hedgies been trading Advance Auto Parts, Inc. (NYSE:AAP)?
At the end of the fourth quarter, a total of 42 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 2% from the previous quarter. The graph below displays the number of hedge funds with bullish position in AAP over the last 18 quarters. With hedge funds' capital changing hands, there exists an "upper tier" of key hedge fund managers who were upping their holdings considerably (or already accumulated large positions).
The largest stake in Advance Auto Parts, Inc. (NYSE:AAP) was held by Melvin Capital Management, which reported holding $429.7 million worth of stock at the end of September. It was followed by Starboard Value LP with a $412.2 million position. Other investors bullish on the company included Adage Capital Management, Balyasny Asset Management, and D E Shaw. 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 11.93% of its 13F portfolio. Lionstone Capital Management is also relatively very bullish on the stock, earmarking 10.65 percent of its 13F equity portfolio to AAP.
With a general bullishness amongst the heavyweights, key hedge funds were breaking ground themselves. Balyasny Asset Management, managed by Dmitry Balyasny, established the largest position in Advance Auto Parts, Inc. (NYSE:AAP). Balyasny Asset Management had $111.2 million invested in the company at the end of the quarter. Anand Parekh's Alyeska Investment Group also initiated a $27.9 million position during the quarter. The following funds were also among the new AAP investors: Doug Gordon, Jon Hilsabeck and Don Jabro's Shellback Capital, Israel Englander's Millennium Management, and Richard SchimeláandáLawrence Sapanski's Cinctive Capital Management.
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. These stocks are WestRock Company (NYSE:WRK), Bio-Rad Laboratories, Inc. (NYSE:BIO), Tractor Supply Company (NASDAQ:TSCO), and StoneCo Ltd. (NASDAQ:STNE). All of these stocks' market caps are closest to AAP's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WRK,35,765253,3 BIO,44,1030931,0 TSCO,44,696994,3 STNE,29,1474730,1 Average,38,991977,1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 38 hedge funds with bullish positions and the average amount invested in these stocks was $992 million. That figure was $1622 million in AAP's case. Bio-Rad Laboratories, Inc. (NYSE:BIO) is the most popular stock in this table. On the other hand StoneCo Ltd. (NASDAQ:STNE) is the least popular one with only 29 bullish hedge fund positions. Advance Auto Parts, Inc. (NYSE:AAP) 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 12.9% in 2020 through March 9th but beat the market by 1.9 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 -18.6% during the same time 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 many of these stocks already outperformed the market so far this year.
Disclosure: None. This article was originally published at Insider Monkey.