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Did Hedge Funds Make The Right Call On AutoNation, Inc. (AN) ?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (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. In this article, we will take a closer look at hedge fund sentiment towards AutoNation, Inc. (NYSE:AN) at the end of the first quarter and determine whether the smart money was really smart about this stock.

AutoNation, Inc. (NYSE:AN) was in 27 hedge funds’ portfolios at the end of March. AN has seen a decrease in activity from the world’s largest hedge funds lately. There were 31 hedge funds in our database with AN positions at the end of the previous quarter. Our calculations also showed that AN isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 58 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.

ESL INVESTMENTS

Edward Lampert of ESL Investments

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s analyze the key hedge fund action regarding AutoNation, Inc. (NYSE:AN).

How have hedgies been trading AutoNation, Inc. (NYSE:AN)?

At the end of the first quarter, a total of 27 of the hedge funds tracked by Insider Monkey were long this stock, a change of -13% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards AN over the last 18 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

Among these funds, Arlington Value Capital held the most valuable stake in AutoNation, Inc. (NYSE:AN), which was worth $64.8 million at the end of the third quarter. On the second spot was ESL Investments which amassed $63.1 million worth of shares. AQR Capital Management, Eminence Capital, and GAMCO Investors were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position ESL Investments allocated the biggest weight to AutoNation, Inc. (NYSE:AN), around 68.2% of its 13F portfolio. Arlington Value Capital is also relatively very bullish on the stock, earmarking 9.42 percent of its 13F equity portfolio to AN.

Judging by the fact that AutoNation, Inc. (NYSE:AN) has faced bearish sentiment from the aggregate hedge fund industry, it’s safe to say that there was a specific group of fund managers that elected to cut their full holdings last quarter. It’s worth mentioning that Renaissance Technologies dumped the biggest position of all the hedgies watched by Insider Monkey, totaling about $10.9 million in stock. Israel Englander’s fund, Millennium Management, also dumped its stock, about $7.4 million worth. These transactions are intriguing to say the least, as total hedge fund interest dropped by 4 funds last quarter.

Let’s now review hedge fund activity in other stocks similar to AutoNation, Inc. (NYSE:AN). We will take a look at Avnet, Inc. (NASDAQ:AVT), Werner Enterprises, Inc. (NASDAQ:WERN), Cenovus Energy Inc (NYSE:CVE), and Companhia Energetica de Minas Gerais (NYSE:CIG). All of these stocks’ market caps are similar to AN’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AVT 24 453381 -9
WERN 17 161749 -4
CVE 24 102988 -7
CIG 10 20207 1
Average 18.75 184581 -4.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.75 hedge funds with bullish positions and the average amount invested in these stocks was $185 million. That figure was $256 million in AN’s case. Avnet, Inc. (NASDAQ:AVT) is the most popular stock in this table. On the other hand Companhia Energetica de Minas Gerais (NYSE:CIG) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks AutoNation, Inc. (NYSE:AN) is more popular among hedge funds. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on AN as the stock returned 33.9% in Q2 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.