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Should I Buy Advance Auto Parts, Inc. (AAP)?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 823 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of June 30th, when the S&P 500 Index was trading around the 3100 level. Stocks kept going up since then. In this article we look at how hedge funds traded Advance Auto Parts, Inc. (NYSE:AAP) and determine whether the smart money was really smart about this stock.

Is Advance Auto Parts, Inc. (NYSE:AAP) undervalued? Hedge funds were taking an optimistic view. The number of long hedge fund positions went up by 9 in recent months. Advance Auto Parts, Inc. (NYSE:AAP) was in 47 hedge funds’ portfolios at the end of June. The all time high for this statistics is 62. Our calculations also showed that AAP 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.

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 56 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.

Jeff Smith

Jeffrey Smith of Starboard Value LP

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. 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. Now let’s take a gander at the latest hedge fund action encompassing Advance Auto Parts, Inc. (NYSE:AAP).

What does smart money think about Advance Auto Parts, Inc. (NYSE:AAP)?

At Q2’s end, a total of 47 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 24% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in AAP over the last 20 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Of the funds tracked by Insider Monkey, Gabriel Plotkin’s Melvin Capital Management has the largest position in Advance Auto Parts, Inc. (NYSE:AAP), worth close to $551.2 million, accounting for 3.3% of its total 13F portfolio. Coming in second is Jeffrey Smith of Starboard Value LP, with a $366.6 million position; the fund has 13.1% of its 13F portfolio invested in the stock. Remaining professional money managers that hold long positions include Daniel Sundheim’s D1 Capital Partners, and Israel Englander’s Millennium Management. In terms of the portfolio weights assigned to each position Starboard Value LP allocated the biggest weight to Advance Auto Parts, Inc. (NYSE:AAP), around 13.06% of its 13F portfolio. Stormborn Capital Management is also relatively very bullish on the stock, designating 6.56 percent of its 13F equity portfolio to AAP.

With a general bullishness amongst the heavyweights, some big names were leading the bulls’ herd. D1 Capital Partners, managed by Daniel Sundheim, established the most outsized position in Advance Auto Parts, Inc. (NYSE:AAP). D1 Capital Partners had $133.2 million invested in the company at the end of the quarter. Alexander Mitchell’s Scopus Asset Management also made a $26.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Louis Bacon’s Moore Global Investments, Gregg Moskowitz’s Interval Partners, and Anthony Joseph Vaccarino’s North Fourth Asset Management.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Advance Auto Parts, Inc. (NYSE:AAP) but similarly valued. We will take a look at NetApp Inc. (NASDAQ:NTAP), Darden Restaurants, Inc. (NYSE:DRI), HubSpot Inc (NYSE:HUBS), Avantor, Inc. (NYSE:AVTR), Qiagen NV (NYSE:QGEN), China Southern Airlines Co Ltd (NYSE:ZNH), and RPM International Inc. (NYSE:RPM). This group of stocks’ market values resemble AAP’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NTAP 25 465896 -1
DRI 49 1202504 -3
HUBS 41 867564 14
AVTR 34 646574 5
QGEN 32 652397 2
ZNH 2 7852 0
RPM 26 108615 4
Average 29.9 564486 3

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.9 hedge funds with bullish positions and the average amount invested in these stocks was $564 million. That figure was $1507 million in AAP’s case. Darden Restaurants, Inc. (NYSE:DRI) is the most popular stock in this table. On the other hand China Southern Airlines Co Ltd (NYSE:ZNH) is the least popular one with only 2 bullish hedge fund positions. Advance Auto Parts, Inc. (NYSE:AAP) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for AAP is 80.6. 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. 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 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 33% in 2020 through the end of August and beat the market by 23.2 percentage points. Unfortunately AAP wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on AAP were disappointed as the stock returned 9.7% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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