Was The Smart Money Right About Advance Auto Parts, Inc. (AAP)?

Is Advance Auto Parts, Inc. (NYSE:AAP) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.

Advance Auto Parts, Inc. (NYSE:AAP) was in 47 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 62. AAP has seen an increase in activity from the world’s largest hedge funds lately. There were 38 hedge funds in our database with AAP positions at the end of the first quarter. 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.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research was 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 best artificial intelligence stocks to pick the best growth 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 to get excerpts of these letters in your inbox. Keeping this in mind we’re going to take a peek at the new hedge fund action encompassing Advance Auto Parts, Inc. (NYSE:AAP).

What have hedge funds been doing with 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 previous quarter. Below, you can check out the change in hedge fund sentiment towards AAP over the last 20 quarters. With the smart money’s capital changing hands, there exists a select group of noteworthy hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

More specifically, Melvin Capital Management was the largest shareholder of Advance Auto Parts, Inc. (NYSE:AAP), with a stake worth $551.2 million reported as of the end of September. Trailing Melvin Capital Management was Starboard Value LP, which amassed a stake valued at $366.6 million. D1 Capital Partners, Melvin Capital Management, 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 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.

Now, specific money managers have jumped into Advance Auto Parts, Inc. (NYSE:AAP) headfirst. D1 Capital Partners, managed by Daniel Sundheim, initiated the biggest 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 now take a look at 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 valuations are closest to AAP’s market valuation.

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 30% in 2020 through October 23rd and beat the market by 21 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 8.8% since the end of June (through 10/23) 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.

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