Is Advance Auto Parts, Inc. (AAP) A Good Stock To Buy?

We started seeing tectonic shifts in the market during the third quarter. Small-cap stocks underperformed the large-cap stocks by more than 10 percentage points between the end of June 2015 and the end of June 2016. A mean reversion in trends bumped small-cap stocks’ return to almost 9% in Q3, outperforming their large-cap peers by 5 percentage points. The momentum in small-cap space hasn’t subsided during this quarter either. Small-cap stocks beat large-cap stocks by another 5 percentage points during the first 7 weeks of this quarter. Hedge funds and institutional investors tracked by Insider Monkey usually invest a disproportionate amount of their portfolios in smaller cap stocks. We have been receiving indications that hedge funds were boosting their overall exposure and this is one of the factors behind the recent movements in major indices. In this article, we will take a closer look at hedge fund sentiment towards Advance Auto Parts, Inc. (NYSE:AAP).

Prominent investors seem to be betting on Advance Auto Parts (NYSE:AAP). The number of bullish hedge fund positions moved up by 11 recently. In this way, the company was included in the equity portfolios of 62 funds from our database at the end of September. At the end of this article we will also compare AAP to other stocks including Twitter Inc (NYSE:TWTR), Pembina Pipeline Corp (NYSE:PBA), and Chipotle Mexican Grill, Inc. (NYSE:CMG) to get a better sense of its popularity.

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What have hedge funds been doing with Advance Auto Parts, Inc. (NYSE:AAP)?

At the end of the third quarter, a total of 62 of the hedge funds tracked by Insider Monkey held long positions in this stock, up by 22% from the previous quarter. With hedgies’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were upping their holdings meaningfully (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Jeffrey Smith’s Starboard Value LP has the largest position in Advance Auto Parts, Inc. (NYSE:AAP), worth close to $421.3 million, comprising 11.5% of its total 13F portfolio. Coming in second is Jeffrey Tannenbaum’s Fir Tree holding a $193.6 million position; 8.3% of its 13F portfolio is allocated to the stock. Other members of the smart money that hold long positions contain Paul Marshall and Ian Wace’s Marshall Wace LLP, Steve Cohen’s Point72 Asset Management, and Curtis Macnguyen’s Ivory Capital (Investment Mgmt).

Now, key hedge funds have been driving this bullishness. Soroban Capital Partners, managed by Eric W. Mandelblatt, initiated the most outsized position in Advance Auto Parts, Inc. (NYSE:AAP). Soroban Capital Partners had $90.1 million invested in the company at the end of the quarter. David Gallo’s Valinor Management LLC also initiated a $88.6 million position during the quarter. The other funds with new positions in the stock are David Greenspan’s Slate Path Capital, Josh Resnick’s Jericho Capital Asset Management, and John Overdeck and David Siegel’s Two Sigma Advisors.

Let’s check out hedge fund activity in other stocks similar to Advance Auto Parts, Inc. (NYSE:AAP). These stocks are Twitter Inc (NYSE:TWTR), Pembina Pipeline Corp (NYSE:PBA), Chipotle Mexican Grill, Inc. (NYSE:CMG), and Federal Realty Investment Trust (NYSE:FRT). All of these stocks’ market caps are closest to AAP’s market cap.

As you can see these stocks had an average of 29 hedge funds with bullish positions and the average amount invested in these stocks was $746 million. That figure was $2.78 billion in AAP’s case. Twitter Inc (NYSE:TWTR) is the most popular stock in this table. On the other hand Pembina Pipeline Corp (NYSE:PBA) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Advance Auto Parts, Inc. (NYSE:AAP) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers, it may be a good idea to analyze it in detail and potentially include it in your portfolio.

Disclosure: None