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Was The Smart Money Right About AutoZone, Inc. (AZO)?

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In this article we are going to use hedge fund sentiment as a tool and determine whether AutoZone, Inc. (NYSE:AZO) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds' picks don't beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.

AutoZone, Inc. (NYSE:AZO) has experienced a decrease in activity from the world's largest hedge funds of late. AutoZone, Inc. (NYSE:AZO) was in 44 hedge funds' portfolios at the end of the fourth quarter of 2020. The all time high for this statistic is 55. There were 53 hedge funds in our database with AZO holdings at the end of September. Our calculations also showed that AZO isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings).

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 124 percentage points since March 2017 (see the details here). That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Gabriel Plotkin Melvin Capital Management
Gabriel Plotkin Melvin Capital Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best hydrogen fuel cell stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Now we're going to take a gander at the key hedge fund action surrounding AutoZone, Inc. (NYSE:AZO).

Do Hedge Funds Think AZO Is A Good Stock To Buy Now?

At the end of the fourth quarter, a total of 44 of the hedge funds tracked by Insider Monkey were long this stock, a change of -17% from the previous quarter. On the other hand, there were a total of 40 hedge funds with a bullish position in AZO a year ago. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is AZO A Good Stock To Buy?
Is AZO A Good Stock To Buy?

When looking at the institutional investors followed by Insider Monkey, Gabriel Plotkin's Melvin Capital Management has the biggest position in AutoZone, Inc. (NYSE:AZO), worth close to $266.7 million, comprising 1.2% of its total 13F portfolio. Coming in second is David Cohen and Harold Levy of Iridian Asset Management, with a $185.8 million position; 3.4% of its 13F portfolio is allocated to the stock. Some other hedge funds and institutional investors that hold long positions comprise Steve Cohen's Point72 Asset Management, Patrick Degorce's Theleme Partners and Cliff Asness's AQR Capital Management. In terms of the portfolio weights assigned to each position Masterton Capital Management allocated the biggest weight to AutoZone, Inc. (NYSE:AZO), around 8.86% of its 13F portfolio. Franklin Street Capital is also relatively very bullish on the stock, dishing out 5.33 percent of its 13F equity portfolio to AZO.

Since AutoZone, Inc. (NYSE:AZO) has witnessed a decline in interest from the smart money, logic holds that there exists a select few funds that slashed their full holdings last quarter. Interestingly, Brandon Haley's Holocene Advisors dumped the largest position of the 750 funds followed by Insider Monkey, valued at about $156.5 million in stock. Phill Gross and Robert Atchinson's fund, Adage Capital Management, also dropped its stock, about $41.5 million worth. These bearish behaviors are important to note, as total hedge fund interest was cut by 9 funds last quarter.

Let's now take a look at hedge fund activity in other stocks similar to AutoZone, Inc. (NYSE:AZO). These stocks are Welltower Inc. (NYSE:WELL), Waste Connections, Inc. (NYSE:WCN), Marathon Petroleum Corp (NYSE:MPC), Zscaler, Inc. (NASDAQ:ZS), Ecopetrol S.A. (NYSE:EC), Interactive Brokers Group, Inc. (NASDAQ:IBKR), and Paycom Software Inc (NYSE:PAYC). This group of stocks' market valuations resemble AZO's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WELL,26,538410,1 WCN,35,626810,3 MPC,43,1883612,-13 ZS,35,1208264,9 EC,7,102902,0 IBKR,28,1108907,0 PAYC,35,748935,-3 Average,29.9,888263,-0.4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.9 hedge funds with bullish positions and the average amount invested in these stocks was $888 million. That figure was $1446 million in AZO's case. Marathon Petroleum Corp (NYSE:MPC) is the most popular stock in this table. On the other hand Ecopetrol S.A. (NYSE:EC) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks AutoZone, Inc. (NYSE:AZO) is more popular among hedge funds. Our overall hedge fund sentiment score for AZO is 70. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 10 most popular stocks among hedge funds returned 90.7% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 35 percentage points. These stocks returned 13.6% in 2021 through April 30th but still managed to beat the market by 1.6 percentage points. Hedge funds were also right about betting on AZO as the stock returned 23.5% since the end of December (through 4/30) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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