Is ORLY A Good Stock To Buy Now?

Hedge Funds and other institutional investors have just completed filing their 13Fs with the Securities and Exchange Commission, revealing their equity portfolios as of the end of September. At Insider Monkey, we follow nearly 817 active hedge funds and notable investors and by analyzing their 13F filings, we can determine the stocks that they are collectively bullish on. One of their picks is O’Reilly Automotive Inc (NASDAQ:ORLY), so let’s take a closer look at the sentiment that surrounds it in the current quarter.

Is ORLY a good stock to buy now? O’Reilly Automotive Inc (NASDAQ:ORLY) investors should be aware of a decrease in activity from the world’s largest hedge funds in recent months. O’Reilly Automotive Inc (NASDAQ:ORLY) was in 58 hedge funds’ portfolios at the end of September. The all time high for this statistics is 64. Our calculations also showed that ORLY 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, we believe electric vehicles and energy storage are set to become giant markets. Tesla’s stock price skyrocketed, yet lithium prices are still below their 2019 highs. So, we are checking out this lithium 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 let’s take a gander at the recent hedge fund action encompassing O’Reilly Automotive Inc (NASDAQ:ORLY).

Hedge fund activity in O’Reilly Automotive Inc (NASDAQ:ORLY)

At the end of September, a total of 58 of the hedge funds tracked by Insider Monkey were long this stock, a change of -5% from the second quarter of 2020. Below, you can check out the change in hedge fund sentiment towards ORLY over the last 21 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

Among these funds, Akre Capital Management held the most valuable stake in O’Reilly Automotive Inc (NASDAQ:ORLY), which was worth $848.6 million at the end of the third quarter. On the second spot was D1 Capital Partners which amassed $626.6 million worth of shares. Two Sigma Advisors, Diamond Hill Capital, and SRS Investment 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 Stamina Capital Management allocated the biggest weight to O’Reilly Automotive Inc (NASDAQ:ORLY), around 7.2% of its 13F portfolio. Akre Capital Management is also relatively very bullish on the stock, earmarking 5.98 percent of its 13F equity portfolio to ORLY.

Because O’Reilly Automotive Inc (NASDAQ:ORLY) has witnessed a decline in interest from the smart money, logic holds that there is a sect of hedge funds that elected to cut their positions entirely by the end of the third quarter. Intriguingly, Andrew Immerman and Jeremy Schiffman’s Palestra Capital Management dropped the largest position of the 750 funds monitored by Insider Monkey, valued at close to $107.4 million in stock, and Alexander Mitchell’s Scopus Asset Management was right behind this move, as the fund cut about $89.6 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 3 funds by the end of the third quarter.

Let’s go over hedge fund activity in other stocks similar to O’Reilly Automotive Inc (NASDAQ:ORLY). We will take a look at Seagen Inc. (NASDAQ:SGEN), ICICI Bank Limited (NYSE:IBN), Centene Corporation (NYSE:CNC), Metlife Inc (NYSE:MET), IDEXX Laboratories, Inc. (NASDAQ:IDXX), CoStar Group Inc (NASDAQ:CSGP), and Canadian Imperial Bank of Commerce (NYSE:CM). This group of stocks’ market valuations match ORLY’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 36.3 hedge funds with bullish positions and the average amount invested in these stocks was $2493 million. That figure was $2687 million in ORLY’s case. Centene Corporation (NYSE:CNC) is the most popular stock in this table. On the other hand Canadian Imperial Bank of Commerce (NYSE:CM) is the least popular one with only 12 bullish hedge fund positions. O’Reilly Automotive Inc (NASDAQ:ORLY) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ORLY is 79.2. 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. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 31.6% in 2020 through December 2nd and beat the market again by 16 percentage points. Unfortunately ORLY wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on ORLY were disappointed as the stock returned -4% since the end of September (through 12/2) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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