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Was The Smart Money Right About O’Reilly Automotive (ORLY)?

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·6 min read
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In this article we will check out the progression of hedge fund sentiment towards O'Reilly Automotive Inc (NASDAQ:ORLY) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

O'Reilly Automotive Inc (NASDAQ:ORLY) was in 49 hedge funds' portfolios at the end of December. The all time high for this statistic is 64. ORLY shareholders have witnessed a decrease in hedge fund sentiment in recent months. There were 58 hedge funds in our database with ORLY positions at the end of the third quarter. Our calculations also showed that ORLY isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings).

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's monthly stock picks returned 197% since March 2017 and outperformed the S&P 500 ETFs by more than 124 percentage points (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Charles Akre Akre Capital Management
Charles Akre Akre Capital Management

Charles Akre of Akre 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 let's take a peek at the latest hedge fund action surrounding O'Reilly Automotive Inc (NASDAQ:ORLY).

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

At the end of December, a total of 49 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -16% from the third quarter of 2020. The graph below displays the number of hedge funds with bullish position in ORLY over the last 22 quarters. With hedgies' positions undergoing their usual ebb and flow, there exists an "upper tier" of notable hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

The largest stake in O'Reilly Automotive Inc (NASDAQ:ORLY) was held by Akre Capital Management, which reported holding $832.6 million worth of stock at the end of December. It was followed by D1 Capital Partners with a $451.2 million position. Other investors bullish on the company included Diamond Hill Capital, Two Sigma Advisors, and D E Shaw. 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 5.63% of its 13F portfolio. Masterton Capital Management is also relatively very bullish on the stock, setting aside 5.4 percent of its 13F equity portfolio to ORLY.

Because O'Reilly Automotive Inc (NASDAQ:ORLY) has faced declining sentiment from the aggregate hedge fund industry, logic holds that there lies a certain "tier" of fund managers who sold off their positions entirely heading into Q1. It's worth mentioning that Bo Shan's Gobi Capital sold off the largest investment of all the hedgies watched by Insider Monkey, totaling an estimated $59.2 million in stock, and Christopher Weldon's Stamina Capital Management was right behind this move, as the fund cut about $25.4 million worth. These transactions are important to note, as total hedge fund interest fell by 9 funds heading into Q1.

Let's check out hedge fund activity in other stocks similar to O'Reilly Automotive Inc (NASDAQ:ORLY). We will take a look at Yum! Brands, Inc. (NYSE:YUM), Carrier Global Corporation (NYSE:CARR), American International Group Inc (NYSE:AIG), Banco Santander (Brasil) SA (NYSE:BSBR), Mizuho Financial Group Inc. (NYSE:MFG), Alcon Inc. (NYSE:ALC), and Tencent Music Entertainment Group (NYSE:TME). All of these stocks' market caps match ORLY's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position YUM,33,1199106,-9 CARR,52,2284818,3 AIG,41,2081359,3 BSBR,6,6844,1 MFG,5,14769,0 ALC,24,653511,-2 TME,26,826299,2 Average,26.7,1009529,-0.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.7 hedge funds with bullish positions and the average amount invested in these stocks was $1010 million. That figure was $2416 million in ORLY's case. Carrier Global Corporation (NYSE:CARR) is the most popular stock in this table. On the other hand Mizuho Financial Group Inc. (NYSE:MFG) is the least popular one with only 5 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. Our overall hedge fund sentiment score for ORLY is 65.8. 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 gained 13.6% in 2021 through April 30th and still beat the market by 1.6 percentage points. Hedge funds were also right about betting on ORLY as the stock returned 22.2% since the end of Q4 (through 4/30) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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