Were Hedge Funds Right About O’Reilly Automotive Inc (ORLY)?

In this article we are going to use hedge fund sentiment as a tool and determine whether O’Reilly Automotive Inc (NASDAQ:ORLY) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds’ picks don’t beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.

O’Reilly Automotive Inc (NASDAQ:ORLY) was in 61 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 64. ORLY investors should pay attention to an increase in enthusiasm from smart money in recent months. There were 60 hedge funds in our database with ORLY holdings at the end of March. Our calculations also showed that ORLY 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).

Video: Watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still 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 underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Ric Dillon of Diamond Hill Capital

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. With all of this in mind we’re going to analyze the latest hedge fund action surrounding O’Reilly Automotive Inc (NASDAQ:ORLY).

Hedge fund activity in O’Reilly Automotive Inc (NASDAQ:ORLY)

Heading into the third quarter of 2020, a total of 61 of the hedge funds tracked by Insider Monkey were long this stock, a change of 2% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in ORLY over the last 20 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in O’Reilly Automotive Inc (NASDAQ:ORLY) was held by Akre Capital Management, which reported holding $776.7 million worth of stock at the end of September. It was followed by D1 Capital Partners with a $756.9 million position. Other investors bullish on the company included Diamond Hill Capital, Palestra Capital Management, and SRS Investment Management. In terms of the portfolio weights assigned to each position Akre Capital Management allocated the biggest weight to O’Reilly Automotive Inc (NASDAQ:ORLY), around 5.85% of its 13F portfolio. D1 Capital Partners is also relatively very bullish on the stock, designating 5.65 percent of its 13F equity portfolio to ORLY.

With a general bullishness amongst the heavyweights, specific money managers were breaking ground themselves. Scopus Asset Management, managed by Alexander Mitchell, created the most outsized position in O’Reilly Automotive Inc (NASDAQ:ORLY). Scopus Asset Management had $89.6 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace’s Marshall Wace LLP also made a $51.2 million investment in the stock during the quarter. The other funds with new positions in the stock are Doug Gordon, Jon Hilsabeck and Don Jabro’s Shellback Capital, Dmitry Balyasny’s Balyasny Asset Management, and Steven Boyd’s Armistice Capital.

Let’s check out hedge fund activity in other stocks similar to O’Reilly Automotive Inc (NASDAQ:ORLY). These stocks are Telefonaktiebolaget LM Ericsson (publ) (NASDAQ:ERIC), Southern Copper Corporation (NYSE:SCCO), Twilio Inc. (NYSE:TWLO), Cognizant Technology Solutions Corp (NASDAQ:CTSH), Chunghwa Telecom Co., Ltd (NYSE:CHT), The Allstate Corporation (NYSE:ALL), and Match Group Holdings II, LLC (NASDAQ:MTCH). All of these stocks’ market caps resemble ORLY’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.7 hedge funds with bullish positions and the average amount invested in these stocks was $1472 million. That figure was $2931 million in ORLY’s case. Twilio Inc. (NYSE:TWLO) is the most popular stock in this table. On the other hand Chunghwa Telecom Co., Ltd (NYSE:CHT) is the least popular one with only 4 bullish hedge fund positions. O’Reilly Automotive Inc (NASDAQ:ORLY) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ORLY is 80.6. 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 ORLY wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ORLY were disappointed as the stock returned 10.8% 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.