Were Hedge Funds Right About Buying AutoZone, Inc. (AZO)?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 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 March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thoughtAutoZone, Inc. (NYSE:AZO) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

AutoZone, Inc. (NYSE:AZO) investors should be aware of an increase in hedge fund interest lately. Our calculations also showed that AZO isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Daniel Sundheim D1 Capital

Daniel Sundheim of D1 Capital Partners

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. 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 gold 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 recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to take a glance at the recent hedge fund action encompassing AutoZone, Inc. (NYSE:AZO).

Hedge fund activity in AutoZone, Inc. (NYSE:AZO)

Heading into the second quarter of 2020, a total of 45 of the hedge funds tracked by Insider Monkey were long this stock, a change of 13% from the previous quarter. The graph below displays the number of hedge funds with bullish position in AZO over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

When looking at the institutional investors followed by Insider Monkey, Melvin Capital Management, managed by Gabriel Plotkin, holds the largest position in AutoZone, Inc. (NYSE:AZO). Melvin Capital Management has a $532.3 million position in the stock, comprising 4.2% of its 13F portfolio. On Melvin Capital Management’s heels is Iridian Asset Management, led by David Cohen and Harold Levy, holding a $166.1 million position; 4% of its 13F portfolio is allocated to the company. Other professional money managers with similar optimism consist of Daniel Sundheim’s D1 Capital Partners, and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position BlueDrive Global Investors allocated the biggest weight to AutoZone, Inc. (NYSE:AZO), around 8.02% of its 13F portfolio. Melvin Capital Management is also relatively very bullish on the stock, earmarking 4.24 percent of its 13F equity portfolio to AZO.

As one would reasonably expect, some big names were leading the bulls’ herd. Melvin Capital Management, managed by Gabriel Plotkin, initiated the most valuable position in AutoZone, Inc. (NYSE:AZO). Melvin Capital Management had $532.3 million invested in the company at the end of the quarter. Daniel Sundheim’s D1 Capital Partners also made a $142.1 million investment in the stock during the quarter. The other funds with brand new AZO positions are Jack Woodruff’s Candlestick Capital Management, Louis Bacon’s Moore Global Investments, and Oscar Hattink’s BlueDrive Global Investors.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as AutoZone, Inc. (NYSE:AZO) but similarly valued. These stocks are PPG Industries, Inc. (NYSE:PPG), Credit Suisse Group AG (NYSE:CS), Fresenius Medical Care AG & Co. KGaA (NYSE:FMS), and Trane Technologies plc (NYSE:TT). This group of stocks’ market values resemble AZO’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PPG 35 393229 0
CS 11 134498 1
FMS 10 16944 -1
TT 36 615498 36
Average 23 290042 9

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 $290 million. That figure was $1355 million in AZO’s case. Trane Technologies plc (NYSE:TT) is the most popular stock in this table. On the other hand Fresenius Medical Care AG & Co. KGaA (NYSE:FMS) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks AutoZone, Inc. (NYSE:AZO) is more popular among hedge funds. 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on AZO as the stock returned 33.3% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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