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Here is What Hedge Funds Think About AutoZone, Inc. (AZO)

Reymerlyn Martin

Coronavirus is probably the #1 concern in investors' minds right now. It should be. On February 27th we published 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 (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. After several tireless days we have finished crunching the numbers from nearly 835 13F filings issued by the elite hedge funds and other investment firms that we track at Insider Monkey, which disclosed those firms' equity portfolios as of December 31st. The results of that effort will be put on display in this article, as we share valuable insight into the smart money sentiment towards AutoZone, Inc. (NYSE:AZO).

Hedge fund interest in AutoZone, Inc. (NYSE:AZO) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare AZO to other stocks including Southwest Airlines Co. (NYSE:LUV), Royal Caribbean Cruises Ltd. (NYSE:RCL), and Cintas Corporation (NASDAQ:CTAS) to get a better sense of its popularity.

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 S&P 500 ETFs by more than 41 percentage points since March 2017 (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_745225" align="aligncenter" width="400"] Noam Gottesman of GLG Partners[/caption]

Noam Gottesman GLG Partners

We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. With all of this in mind we're going to review the fresh hedge fund action surrounding AutoZone, Inc. (NYSE:AZO).

How are hedge funds trading AutoZone, Inc. (NYSE:AZO)?

Heading into the first quarter of 2020, a total of 40 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from one quarter earlier. On the other hand, there were a total of 40 hedge funds with a bullish position in AZO a year ago. With hedgies' capital changing hands, there exists a select group of key hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, David Cohen and Harold Levy's Iridian Asset Management has the largest position in AutoZone, Inc. (NYSE:AZO), worth close to $239.4 million, corresponding to 3.9% of its total 13F portfolio. On Iridian Asset Management's heels is Peter Rathjens, Bruce Clarke and John Campbell of Arrowstreet Capital, with a $232.1 million position; 0.5% of its 13F portfolio is allocated to the stock. Some other members of the smart money with similar optimism consist of Renaissance Technologies, Cliff Asness's AQR Capital Management and Noam Gottesman's GLG Partners. In terms of the portfolio weights assigned to each position Element Capital Management allocated the biggest weight to AutoZone, Inc. (NYSE:AZO), around 6.55% of its 13F portfolio. MIK Capital is also relatively very bullish on the stock, setting aside 5.62 percent of its 13F equity portfolio to AZO.

Because AutoZone, Inc. (NYSE:AZO) has faced declining sentiment from the aggregate hedge fund industry, it's easy to see that there was a specific group of hedgies that slashed their full holdings in the third quarter. Intriguingly, Oscar Hattink's BlueDrive Global Investors dropped the largest position of the "upper crust" of funds followed by Insider Monkey, totaling about $24.7 million in stock. Michael Gelband's fund, ExodusPoint Capital, also sold off its stock, about $2 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's go over hedge fund activity in other stocks similar to AutoZone, Inc. (NYSE:AZO). We will take a look at Southwest Airlines Co. (NYSE:LUV), Royal Caribbean Cruises Ltd. (NYSE:RCL), Cintas Corporation (NASDAQ:CTAS), and Alcon Inc. (NYSE:ALC). This group of stocks' market values are closest to AZO's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position LUV,44,3650217,4 RCL,43,1386244,-6 CTAS,45,820938,4 ALC,24,705505,0 Average,39,1640726,0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 39 hedge funds with bullish positions and the average amount invested in these stocks was $1641 million. That figure was $1597 million in AZO's case. Cintas Corporation (NASDAQ:CTAS) is the most popular stock in this table. On the other hand Alcon Inc. (NYSE:ALC) is the least popular one with only 24 bullish hedge fund positions. AutoZone, Inc. (NYSE:AZO) 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 17.4% in 2020 through March 25th but beat the market by 5.5 percentage points. Unfortunately AZO wasn't nearly as popular as these 20 stocks and hedge funds that were betting on AZO were disappointed as the stock returned -29.1% 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. 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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