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

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards AutoZone, Inc. (NYSE:AZO).

Is AutoZone, Inc. (NYSE:AZO) a splendid investment today? The smart money was taking a bullish view. The number of bullish hedge fund positions inched up by 10 lately. AutoZone, Inc. (NYSE:AZO) was in 55 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 46. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that AZO 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). There were 45 hedge funds in our database with AZO holdings at the end of March.

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 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. 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 review the fresh hedge fund action surrounding AutoZone, Inc. (NYSE:AZO).

How are hedge funds trading AutoZone, Inc. (NYSE:AZO)?

At the end of June, a total of 55 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 22% from the previous quarter. By comparison, 37 hedge funds held shares or bullish call options in AZO a year ago. With hedgies’ sentiment swirling, there exists a few key hedge fund managers who were adding to their stakes substantially (or already accumulated large positions).

More specifically, Melvin Capital Management was the largest shareholder of AutoZone, Inc. (NYSE:AZO), with a stake worth $984.3 million reported as of the end of September. Trailing Melvin Capital Management was Iridian Asset Management, which amassed a stake valued at $188.2 million. Holocene Advisors, Citadel Investment Group, and D1 Capital Partners 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 BlueDrive Global Investors allocated the biggest weight to AutoZone, Inc. (NYSE:AZO), around 8.16% of its 13F portfolio. Melvin Capital Management is also relatively very bullish on the stock, earmarking 5.82 percent of its 13F equity portfolio to AZO.

Now, key hedge funds were leading the bulls’ herd. Eminence Capital, managed by Ricky Sandler, initiated the largest position in AutoZone, Inc. (NYSE:AZO). Eminence Capital had $32.9 million invested in the company at the end of the quarter. Steven Boyd’s Armistice Capital also made a $31.6 million investment in the stock during the quarter. The other funds with new positions in the stock are Stanley Druckenmiller’s Duquesne Capital, Paul Marshall and Ian Wace’s Marshall Wace LLP, and Clint Carlson’s Carlson Capital.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as AutoZone, Inc. (NYSE:AZO) but similarly valued. These stocks are Yum! Brands, Inc. (NYSE:YUM), Republic Services, Inc. (NYSE:RSG), KKR & Co Inc. (NYSE:KKR), Datadog, Inc. (NASDAQ:DDOG), Hormel Foods Corporation (NYSE:HRL), PACCAR Inc (NASDAQ:PCAR), and AFLAC Incorporated (NYSE:AFL). This group of stocks’ market caps are similar to AZO’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 39.6 hedge funds with bullish positions and the average amount invested in these stocks was $1347 million. That figure was $2395 million in AZO’s case. Datadog, Inc. (NASDAQ:DDOG) is the most popular stock in this table. On the other hand Hormel Foods Corporation (NYSE:HRL) is the least popular one with only 27 bullish hedge fund positions. AutoZone, Inc. (NYSE:AZO) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for AZO is 86.7. 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 29.2% in 2020 through October 16th and beat the market by 19.7 percentage points. Unfortunately AZO wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on AZO were disappointed as the stock returned 5.8% since the end of June (through 10/16) 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.