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Hedge Funds Dipping Their Toes Back Into AutoNation, Inc. (AN)

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding AutoNation, Inc. (NYSE:AN) and determine whether hedge funds had an edge regarding this stock.

AutoNation, Inc. (NYSE:AN) has experienced an increase in enthusiasm from smart money recently. AutoNation, Inc. (NYSE:AN) was in 29 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 36. Our calculations also showed that AN isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.

To most stock holders, hedge funds are viewed as slow, outdated investment tools of years past. While there are more than 8000 funds in operation at present, Our researchers hone in on the leaders of this club, about 850 funds. Most estimates calculate that this group of people direct bulk of all hedge funds’ total capital, and by tracking their top stock picks, Insider Monkey has uncovered various investment strategies that have historically exceeded the broader indices. Insider Monkey’s flagship short hedge fund strategy outpaced the S&P 500 short ETFs by around 20 percentage points annually since its inception in March 2017. Our portfolio of short stocks lost 34% since February 2017 (through August 17th) even though the market was up 53% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

ESL INVESTMENTS

Edward Lampert of ESL Investments

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. With all of this in mind let’s take a look at the latest hedge fund action regarding AutoNation, Inc. (NYSE:AN).

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

At the end of the second quarter, a total of 29 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 7% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in AN over the last 20 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).

The largest stake in AutoNation, Inc. (NYSE:AN) was held by ESL Investments, which reported holding $84.6 million worth of stock at the end of September. It was followed by AQR Capital Management with a $47.7 million position. Other investors bullish on the company included Arrowstreet Capital, GAMCO Investors, and D E Shaw. In terms of the portfolio weights assigned to each position ESL Investments allocated the biggest weight to AutoNation, Inc. (NYSE:AN), around 66.31% of its 13F portfolio. Steel Canyon Capital is also relatively very bullish on the stock, earmarking 3.1 percent of its 13F equity portfolio to AN.

Now, key money managers were breaking ground themselves. Millennium Management, managed by Israel Englander, initiated the biggest position in AutoNation, Inc. (NYSE:AN). Millennium Management had $18.9 million invested in the company at the end of the quarter. Renaissance Technologies also made a $14 million investment in the stock during the quarter. The other funds with brand new AN positions are Jack Woodruff’s Candlestick Capital Management, Charles Davidson and Joseph Jacobs’s Wexford Capital, and Matthew Hulsizer’s PEAK6 Capital Management.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as AutoNation, Inc. (NYSE:AN) but similarly valued. These stocks are Kohl’s Corporation (NYSE:KSS), Brooks Automation, Inc. (NASDAQ:BRKS), AVITA Therapeutics, Inc. (NASDAQ:RCEL), Xerox Holdings Corporation (NYSE:XRX), Cohen & Steers, Inc. (NYSE:CNS), Energizer Holdings, Inc. (NYSE:ENR), and SVMK Inc. (NASDAQ:SVMK). This group of stocks’ market caps are closest to AN’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
KSS 42 337352 16
BRKS 15 163794 -3
RCEL 2 30930 -1
XRX 35 679082 -6
CNS 21 86926 1
ENR 25 277086 4
SVMK 33 309964 4
Average 24.7 269305 2.1

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.7 hedge funds with bullish positions and the average amount invested in these stocks was $269 million. That figure was $294 million in AN’s case. Kohl’s Corporation (NYSE:KSS) is the most popular stock in this table. On the other hand AVITA Therapeutics, Inc. (NASDAQ:RCEL) is the least popular one with only 2 bullish hedge fund positions. AutoNation, Inc. (NYSE:AN) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for AN is 64.9. 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 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 23.8% in 2020 through September 14th and still beat the market by 17.6 percentage points. Hedge funds were also right about betting on AN as the stock returned 49.2% during Q3 (through September 14th) 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.