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How Did AutoZone, Inc. (AZO) Compare Against Top Hedge Fund Stocks in 2019?

Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ complex research processes to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space. Nevertheless, it is also possible to find underpriced large-cap stocks by following the hedge funds’ moves. In this article, we look at what those funds think of AutoZone, Inc. (NYSE:AZO) based on that data.

AutoZone, Inc. (NYSE:AZO) has seen a decrease in support from the world’s most elite money managers of late. Our calculations also showed that AZO isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Paul Marshall Marshall Wace

Paul Marshall of Marshall Wace

We leave no stone unturned when looking for the next great investment idea. For example one of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock is still extremely cheap despite already gaining 20 percent. With all of this in mind let’s view the recent hedge fund action surrounding AutoZone, Inc. (NYSE:AZO).

What have hedge funds been doing with AutoZone, Inc. (NYSE:AZO)?

At the end of the third quarter, a total of 35 of the hedge funds tracked by Insider Monkey were long this stock, a change of -5% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards AZO over the last 17 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).

More specifically, Iridian Asset Management was the largest shareholder of AutoZone, Inc. (NYSE:AZO), with a stake worth $251.7 million reported as of the end of September. Trailing Iridian Asset Management was Arrowstreet Capital, which amassed a stake valued at $227 million. Renaissance Technologies, AQR Capital Management, and GLG Partners 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 BlueDrive Global Investors allocated the biggest weight to AutoZone, Inc. (NYSE:AZO), around 7.39% of its 13F portfolio. Iridian Asset Management is also relatively very bullish on the stock, designating 3.94 percent of its 13F equity portfolio to AZO.

Due to the fact that AutoZone, Inc. (NYSE:AZO) has witnessed bearish sentiment from hedge fund managers, it’s easy to see that there exists a select few funds that elected to cut their full holdings heading into Q4. At the top of the heap, Dmitry Balyasny’s Balyasny Asset Management dumped the biggest stake of the 750 funds followed by Insider Monkey, comprising about $24.2 million in stock. Clint Carlson’s fund, Carlson Capital, also cut its stock, about $16.7 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 2 funds heading into Q4.

Let’s now review hedge fund activity in other stocks similar to AutoZone, Inc. (NYSE:AZO). We will take a look at FirstEnergy Corp. (NYSE:FE), Verisk Analytics, Inc. (NASDAQ:VRSK), Discover Financial Services (NYSE:DFS), and Cummins Inc. (NYSE:CMI). This group of stocks’ market caps are similar to AZO’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
FE 32 2451597 -2
VRSK 30 668085 0
DFS 37 935893 -2
CMI 31 857313 -14
Average 32.5 1228222 -4.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 32.5 hedge funds with bullish positions and the average amount invested in these stocks was $1228 million. That figure was $1329 million in AZO’s case. Discover Financial Services (NYSE:DFS) is the most popular stock in this table. On the other hand Verisk Analytics, Inc. (NASDAQ:VRSK) is the least popular one with only 30 bullish hedge fund positions. AutoZone, Inc. (NYSE:AZO) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on AZO as the stock returned 44.8% in 2019 (through December 23rd) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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