Is AN A Good Stock To Buy According To Hedge Funds?

Many prominent investors, including Warren Buffett, David Tepper and Stan Druckenmiller, have been cautious regarding the current bull market and missed out as the stock market reached another high in recent weeks. On the other hand, technology hedge funds weren’t timid and registered double digit market beating gains. Financials, energy and industrial stocks aren’t doing great but many of the stocks that delivered strong returns since March are still going very strong and hedge funds actually increased their positions in these stocks. In this article we will find out how hedge fund sentiment to AutoNation, Inc. (NYSE:AN) changed recently.

Is AN a good stock to buy? AutoNation, Inc. (NYSE:AN) was in 33 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistic is 36. AN has seen an increase in hedge fund sentiment lately. There were 29 hedge funds in our database with AN positions at the end of the second quarter. Our calculations also showed that AN isn’t among the 30 most popular stocks among hedge funds (click for Q3 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.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 66 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, the House passed a landmark bill decriminalizing marijuana. So, we are checking out this under the radar cannabis stock right now. We go through lists like the 15 best blue chip stocks to buy 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. 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 website. Now we’re going to go over the fresh hedge fund action encompassing AutoNation, Inc. (NYSE:AN).

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

At the end of September, a total of 33 of the hedge funds tracked by Insider Monkey were long this stock, a change of 14% from the second quarter of 2020. By comparison, 24 hedge funds held shares or bullish call options in AN a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

Among these funds, ESL Investments held the most valuable stake in AutoNation, Inc. (NYSE:AN), which was worth $119.1 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $88.4 million worth of shares. Arrowstreet Capital, GAMCO Investors, and Millennium Management 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 64.12% of its 13F portfolio. Legion Partners Asset Management is also relatively very bullish on the stock, setting aside 5.7 percent of its 13F equity portfolio to AN.

As aggregate interest increased, key hedge funds have jumped into AutoNation, Inc. (NYSE:AN) headfirst. Capital Growth Management, managed by Ken Heebner, initiated the most valuable position in AutoNation, Inc. (NYSE:AN). Capital Growth Management had $16.9 million invested in the company at the end of the quarter. Richard SchimeláandáLawrence Sapanski’s Cinctive Capital Management also initiated a $4.1 million position during the quarter. The other funds with new positions in the stock are Greg Eisner’s Engineers Gate Manager, Sander Gerber’s Hudson Bay Capital Management, and Parvinder Thiara’s Athanor Capital.

Let’s now review hedge fund activity in other stocks similar to AutoNation, Inc. (NYSE:AN). These stocks are Tempur Sealy International Inc. (NYSE:TPX), Performance Food Group Company (NYSE:PFGC), BridgeBio Pharma, Inc. (NASDAQ:BBIO), Zai Lab Limited (NASDAQ:ZLAB), Science Applications International Corp (NYSE:SAIC), Stag Industrial Inc (NYSE:STAG), and Hutchison China MediTech Limited (NASDAQ:HCM). All of these stocks’ market caps are closest to AN’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 23 hedge funds with bullish positions and the average amount invested in these stocks was $518 million. That figure was $414 million in AN’s case. Tempur Sealy International Inc. (NYSE:TPX) is the most popular stock in this table. On the other hand Hutchison China MediTech Limited (NASDAQ:HCM) is the least popular one with only 5 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 70.6. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 33.3% in 2020 through December 18th and still beat the market by 16.4 percentage points. Hedge funds were also right about betting on AN as the stock returned 29.7% since the end of Q3 (through 12/18) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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