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

We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Ackman’s recent Valeant losses). However, it is still good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Advance Auto Parts, Inc. (NYSE:AAP).

Advance Auto Parts, Inc. (NYSE:AAP) has seen an increase in activity from the world’s largest hedge funds recently. At the end of this article we will also compare AAP to other stocks including KeyCorp (NYSE:KEY), Macy’s, Inc. (NYSE:M), and Waters Corporation (NYSE:WAT) to get a better sense of its popularity.

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We are going to discuss the hedge fund sentiment towards Advance Auto Parts in more details later on in this article, but before we get to that, let’s assess the latest developments surrounding the company.

Advance Auto Parts’ stock has inched up by around 3% over the last 52 weeks. In December, the stock popped following reports that the company might be acquired and, according to Bloomberg, a potential buyer could’ve been O’Reilly Automotive. In September 2015, activist fund Starboard Value, led by Jeff Smith, disclosed a 3.7% in Advance Auto Parts and revealed a letter sent to the company’s CEO at the time Darren R. Jackson and the Board of Directors. On the next page, we are going to take a closer look at Starboard’s comments and take a closer look at the hedge fund sentiment that surrounds the stock.

“We believe that Advance can achieve a share price of more than $350 by implementing a comprehensive margin improvement program, together with additional value creation opportunities, including substantial working capital improvements, realizing the value of Worldpac, and implementing a daily delivery program to drive commercial sales.  Moreover, if Advance realizes margins and multiples in line with O’Reilly, which we believe is achievable, its stock could be worth well over $400,” Starboard said.

“We believe Advance’s tremendous operational improvement opportunity, combined with its discounted trading multiple, makes Advance an extremely compelling investment opportunity, and therefore have chosen to discuss Advance at the conference. Since the conference materials will be public, but may not be widely disseminated, we have included them as an attachment to this letter, so that you and the Board, as well as all shareholders of the Company, can understand our view of this compelling opportunity for Advance,” the investor added.

Now, let’s take a look at the latest action encompassing Advance Auto Parts, Inc. (NYSE:AAP).

How have hedgies been trading Advance Auto Parts, Inc. (NYSE:AAP)?

At Q4’s end, a total of 56 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 27% from one quarter earlier. 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).

Of the funds tracked by Insider Monkey, Starboard Value holds the most valuable position in Advance Auto Parts, Inc. (NYSE:AAP). Starboard Value LP has a $257 million position in the stock, comprising 6.9% of its 13F portfolio. Coming in second is Point72 Asset Management, led by Steve Cohen, holding a $218.9 million position; the fund has 1.8% of its 13F portfolio invested in the stock and it initiated a position during the fourth quarter. Some other peers that are bullish comprise Jeffrey Tannenbaum’s Fir Tree, Ken Griffin’s Citadel Investment Group and Israel Englander’s Millennium Management.

Consequently, key hedge funds have jumped into Advance Auto Parts, Inc. (NYSE:AAP) headfirst. Point72 Asset Management assembled the most valuable position in Advance Auto Parts, Inc. (NYSE:AAP). Point72 Asset Management had $218.9 million invested in the company at the end of the quarter. Barry Rosenstein’s JANA Partners also made a $84.6 million investment in the stock during the quarter. The other funds with new positions in the stock are Benjamin A. Smith’s Laurion Capital Management, Gregory Thomas’s Carbonado Capital, and Jorge Paulo Lemann’s 3G Capital.

Let’s also examine hedge fund activity in other stocks similar to Advance Auto Parts, Inc. (NYSE:AAP). These stocks are KeyCorp (NYSE:KEY), Macy’s, Inc. (NYSE:M), Waters Corporation (NYSE:WAT), and Autoliv Inc. (NYSE:ALV). This group of stocks’ market caps match 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 $785 million. That figure was $1.72 billion in AAP’s case. Macy’s, Inc. (NYSE:M) is the most popular stock in this table. On the other hand Autoliv Inc. (NYSE:ALV) is the least popular one with only 10 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.