Should You Avoid AutoNation, Inc. (AN)?

The equity market returns were very disappointing in the third quarter, “thanks” to the slowdown of China’s economy and the weaker-than-expected U.S. economic data. It was not entirely clear whether the broader market sell-off made U.S. equity valuations undervalued, but it definitely made them more attractive. It is worth mentioning that Russell 2000 ETF (IWM) underperformed the broad-market S&P 500 ETF by more than 14 percentage points during the period of June 25, 2015 through October 30, 2015. This clearly points to the fact that most investors, including hedge fund firms and institutional investors, heavily cut their exposure to high-potential (but seemingly riskier) small-cap stocks during the bloody third quarter. So let’s take a glance at the smart money sentiment towards AutoNation, Inc. (NYSE:AN) and see how it was affected.

Is AutoNation, Inc. a healthy stock for your portfolio? The smart money is getting less bullish. The number of bullish hedge fund bets retreated by 6 lately. AN was in 31 hedge funds’ portfolios at the end of September. There were 37 hedge funds in our database with AN holdings at the end of the previous quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity, but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Duke Realty Corp (NYSE:DRE), Weatherford International Ltd (NYSE:WFT), and Broadridge Financial Solutions, Inc. (NYSE:BR) to gather more data points.

If you’d ask most shareholders, hedge funds are perceived as worthless, outdated investment tools of yesteryear. While there are greater than 8000 funds with their doors open at the moment, We look at the upper echelon of this group, approximately 700 funds. Most estimates calculate that this group of people preside over the lion’s share of the smart money’s total asset base, and by paying attention to their matchless investments, Insider Monkey has determined numerous investment strategies that have historically outpaced the market. Insider Monkey’s small-cap hedge fund strategy surpassed the S&P 500 index by 12 percentage points annually for a decade in their back tests.

With all of this in mind, let’s analyze the new action surrounding AutoNation, Inc. (NYSE:AN).

How are hedge funds trading AutoNation, Inc. (NYSE:AN)?

At Q3’s end, a total of 31 of the hedge funds tracked by Insider Monkey were bullish on this stock, down by 16% from the second quarter. With hedgies’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Edward Lampert’s ESL Investments has the number one position in AutoNation, Inc. (NYSE:AN), worth close to $395.1 million, amounting to 25.2% of its total 13F portfolio. On ESL Investments’s heels is Murray Stahl of Horizon Asset Management, with a $194.2 million position; the fund has 3.5% of its 13F portfolio invested in the stock. Remaining hedge funds and institutional investors with similar optimism encompass Michael Larson’s Bill & Melinda Gates Foundation Trust, Larry Robbins’s Glenview Capital and Keith Meister’s Corvex Capital.

Due to the fact that AutoNation, Inc. (NYSE:AN) has faced falling interest from hedge fund managers, it’s safe to say that there was a specific group of hedge funds who were dropping their positions entirely heading into Q4. It’s worth mentioning that Doug Gordon, Jon Hilsabeck and Don Jabro’s Shellback Capital dropped the biggest investment of all the hedgies watched by Insider Monkey, totaling an estimated $28.3 million in stock, and Michael Messner’s Seminole Capital (Investment Mgmt) was right behind this move, as the fund dropped about $23.4 million worth of shares. These moves are intriguing to say the least, as total hedge fund interest fell by 6 funds heading into Q4.

Let’s check out hedge fund activity in other stocks similar to AutoNation, Inc. (NYSE:AN). We will take a look at Duke Realty Corp (NYSE:DRE), Weatherford International Ltd (NYSE:WFT), Broadridge Financial Solutions, Inc. (NYSE:BR), and Iron Mountain Incorporated (NYSE:IRM). All of these stocks’ market caps are similar to AN’s market cap.

As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $328 million. That figure was $1.34 billion in AN’s case. Weatherford International Ltd (NYSE:WFT) is the most popular stock in this table. On the other hand Duke Realty Corp (NYSE:DRE) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks AutoNation, Inc. (NYSE:AN) is more popular among hedge funds, however, it is also important to note that Edward Lampert has been winding down his position in AN for some time now, dropping as much as 6% of his holding during the third quarter alone. Therefore, we believe it may be a good idea to analyze it in detail to find out if this stock is a viable candidate for a long position.