Five Auto Parts Suppliers That Hedge Funds Love

The fortunes of the US auto industry might be in doldrums with sales having peaked and falling on a year-on-year basis, but this hasn’t had any impact on auto parts suppliers.  Shares of most auto parts suppliers have registered solid gains this year and some of them are trading close to their lifetime highs. With analysts continuing to remain bullish on the industry as a whole and routinely raising their estimates, this bull run is expected to last much longer. However, amid all the gains, this rally across the sector has also made it increasingly difficult for investors to differentiate between the good and the not so good stocks within the space. To solve that problem and to help our readers in selecting the appropriate stocks for their portfolios, we at Insider Monkey have made a list of auto part suppliers based on their popularity at the end of second quarter among the 750 hedge funds tracked by us. In this post, we will reveal the names of the five stocks that topped our list and will analyze their performances thus far in 2016.

We believe that imitating hedge funds and other large institutional investors can be helpful in identifying stocks capable of outperforming the broader market. Through extensive research that covered portfolios of several hundred large investors between 1999 and 2012, we determined that following the small-cap stocks that large money managers are collectively bullish on, can generate monthly returns nearly 1.0 percentage points above the market (see the details here).

#5 Johnson Controls Inc (NYSE:JCI)

– Hedge Funds with Long Positions (as of June 30): 32

– Value of Hedge Funds’ Holdings (as of June 30): $1.09 Billion

The fifth spot in our list is taken by Johnson Controls Inc (NYSE:JCI), whose ownership among hedge funds covered by us increased by five during the second quarter , while the aggregate value of their holdings in it rose by $441 million. Johnson Controls Inc (NYSE:JCI)’s stock suffered a big decline in the second-half of 2015. However, it has managed to recoup some of that loss this year and is currently trading up by 11% year-to-date. The company recently completed its merger with Tyco International, which was announced in January, and is currently in the process of spinning off its automotive parts business into a separate publicly traded entity named Adient. In a press release issued last month, Adient revealed that it plans to achieve $17 billion in annual revenues in fiscal year 2017, which will be its first year as an independent company. Moreover, it expects the annual revenues to grow at a healthy rate once it is free from capex constraints tied to being housed within JCI.

#4 Allison Transmission Holdings Inc (NYSE:ALSN)

– Hedge Funds with Long Positions (as of June 30): 34

– Value of Hedge Funds’ Holdings (as of June 30): $1.84 Billion

Allison Transmission Holdings Inc (NYSE:ALSN) is the only stock covered in this list that saw its ownership among hedge funds covered by us fall (by four funds) during the second quarter. Nevertheless, the aggregate value of hedge funds’ holdings in the company during that time saw a meager increase of 2.27%.  Shares of the Indiana based company were in a consistent decline last year, but changed their course in February this year and are currently trading up by 7% for 2016. Allison Transmission Holdings Inc (NYSE:ALSN) currently pays a quarterly dividend of $0.15 per share, which translates into an annual dividend yield of 2.17%. Despite last year’s heavy decline, most analyst don’t think that the stock is still trading at a significant discount to its fair value. However, they continue to remain optimistic on the stock citing greater adoption of automatic transmissions in the international markets over the next decade. On September 30, analysts at Credit Agricole SA started coverage on the stock with an ‘Outperform’ rating and $31 price target.

#3 WABCO Holdings Inc. (NYSE:WBC)

– Hedge Funds with Long Positions (as of June 30): 35

– Value of Hedge Funds’ Holdings (as of June 30): $1.27 Billion

The number of hedge funds tracked by us that had long positions in WABCO Holdings Inc. (NYSE:WBC) increased by three during the second quarter, though the aggregate value of their holdings in it fell by $32 million. With ownership of over 3.23 million shares of WABCO Holdings Inc. (NYSE:WBC), investing legend Warren Buffett‘s Berkshire Hathaway continued to remain the largest shareholder of the company at the end of June among funds in our database. Shares of the truck parts supplier were beaten aggressively after the Brexit result owing to the high exposure it has to Europe, which accounted for 55% of its revenue in fiscal year 2015. However, the stock has had a stellar rally in the third quarter and  have gained 5% year-to-date. For its fiscal 2016 third quarter, analysts are expecting the company to report EPS of $1.48 on revenue of $701.93 million. For the same quarter last year, WABCO Holdings reported EPS of $1.39 on revenue of $643.6 million.

#2 O’Reilly Automotive Inc (NASDAQ:ORLY)

– Hedge Funds with Long Positions (as of June 30): 44

– Value of Hedge Funds’ Holdings (as of June 30): $1.46 Billion

Moving on, the ownership of O’Reilly Automotive Inc (NASDAQ:ORLY) among funds covered by us inched up by two and the aggregate value of their holdings in it jumped by 58.5% during the second quarter. Shares of the Missouri-based auto parts retailer recently made their lifetime high at $292.84 and are currently trading 8.24% in the green for 2016. Owing to the profitable growth the company has displayed over the past many years and a consistent rise in its stock price during that time, a lot of analysts consider O’Reilly Automotive Inc (NASDAQ:ORLY) to be among the best buy-and-hold stock for long-term investors. The 26 leading analysts who cover the stock currently have an average rating of ‘Overweight’ and an average price target of $307.75 on it, which represents a potential upside of 10% from its current trading price.

#1 Advance Auto Parts, Inc. (NYSE:AAP)

– Hedge Funds with Long Positions (as of June 30): 51

– Value of Hedge Funds’ Holdings (as of June 30): $2.35 Billion

Advance Auto Parts, Inc. (NYSE:AAP) continued to remain the most popular auto supplier stock at the end of June among hedge funds tracked by Insider Monkey. During the second quarter, the number of funds covered by us that were long the stock increased by five while the aggregate value of their holdings in it advanced by 48%. Interestingly, Advance Auto Parts, Inc. (NYSE:AAP) is also the only stock covered in this list that is currently trading in the red for 2016, down by 2.5%, owing partially to the decline it has witnessed since August 16, when the company reported its second-quarter numbers. While analysts had expected EPS of $2.12 for that period, Advance Auto Parts reported EPS of only $1.90. Nonetheless, the revenue of $2.26 billion was slightly better than analysts’ expectation of $2.24 billion. Due to the lower comps being reported by the company, which in effect is driving its margin lower, and the steep trailing P/E of 23.70 at which the stock is trading currently, many analysts have lowered their price target on the stock, including RBC Capital Markets, which last month lowered it to $174 from $180 while keeping their rating unchanged at ‘Outperform’.

Disclosure: None