Advance Auto Parts, Inc. (NYSE:AAP) is all set to join the S&P 500 Index. The automotive aftermarket parts provider will be replacing the Family Dollar Stores, Inc. (NYSE:FDO) in the index following the retailer’s merger with Dollar Tree, Inc. (NASDAQ:DLTR). The change to the S&P 500 index will go into effect shortly, after the market close on Wednesday. Meanwhile, Jack in the Box Inc. (NASDAQ:JACK) will take over Advance Auto Parts’ previous spot in the S&P Mid-Cap 400; both stocks made gains in after-hours trading. In addition to its 1% gain on Monday, Advance Auto Parts, Inc. (NYSE:AAP) was doing even better in after-hours trading, with the stock gaining another 2.3% in after hours.
It is not only the premium S&P 500 that has shown interest in Advance Auto Parts, the smart money has also begun to invest more heavily in the company. Looking at the hedge fund sentiment on Advance Auto Parts, Inc. (NYSE:AAP), there were 42 hedge funds with $1.38 billion in shares of the company at the end of March. While the overall ownership declined from 46 hedge funds holding long positions in the stock at the end of 2014, aggregate capital invested in the stock was just $994.1 million at that time, showing a nearly 40% increase. Considering the fact that the stock also lost about 6% in the first three months, we can say that the best money managers in the world were quite bullish on this stock during the first quarter. Nor have they been wrong, as AAP has gained about 10% since the end of the first quarter ahead of its entry into the S&P 500 index.
Most investors don’t understand hedge funds and indicators that are based on hedge fund and insider activity. They ignore hedge funds because of their recent poor performance in the long-running bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns enjoyed (or not) by investors. We uncovered through extensive research that hedge funds’ long positions in small-cap stocks actually greatly outperformed the market from 1999 to 2012, and built a system around this. The 15 most popular small-cap stocks among funds beat the S&P 500 Index by more than 80 percentage points since the end of August 2012 when this system went live, returning a cumulative 135% vs. less than 55% for the S&P 500 Index (read the details).
Likewise, other research (not our own) has shown insider purchases are also effective piggybacking methods for investors that lead to greater returns. That’s why we believe investors should pay attention to what hedge funds and insiders are buying and keep them apprised of this information. There were no insider purchase of the shares in the first half of this year, but there were a few insider sales. Notably, CFO at Advance Auto Parts, Inc. (NYSE:AAP) Michael Norona sold around 30,000 shares in May and Director Gilbert Ray sold around 4,200 shares in February.
Let’s review the fresh hedge fund activity on Advance Auto Parts, Inc. (NYSE:AAP) now.
How have hedgies been trading Advance Auto Parts, Inc. (NYSE:AAP)?
According to Insider Monkey’s database, Fir Tree, founded by Jeffrey Tannenbaum had the largest position in Advance Auto Parts, Inc. (NYSE:AAP), with around 1.8 million shares worth close to $274.7 million at the end of March, accounting for 3.9% of its total 13F portfolio. Coming in second is Bain Capital, managing Brookside Capital, with around 1.2 million shares valued at $175.9 million at the end of first trimester; the fund has 4.4% of its 13F portfolio invested in the stock. Some other members of the smart money that are bullish include Israel Englander’s Millennium Management, Steve Cohen‘s Point72 Asset Management, and John Burbank’s Passport Capital.
Even though the number of hedge funds holding long positions in the stock was reduced in the first quarter, the aggregate capital invested by the hedge funds has increased significantly during the quarter. This shows that there were some hedge fund managers who opted to move out of this stock, but there were other hedge fund managers who strengthened their position in the stock considerably. Notably, Fir Tree, which as mentioned held the largest position in the stock at the end of March, had just 278,000 shares in the company at the end of 2014. Israel Englander’s Millennium Management had around 800,000 shares at the end of the first quarter, up from around 200,000 shares at the end of last year. Among the hedge funds who opted to say good bye to the stock, Christopher Medlock James‘ Partner Fund Management lead the way by selling around 420,000 shares during the first three months.
Hedge funds were bullish on Advance Auto Parts, Inc. (NYSE:AAP) during the first quarter and the inclusion of the stock into the S&P 500 index is an additional boost for it. Hedge funds were right in investing more in the stock during the first quarter, but the hedge fund activity on the stock during the second quarter might give us more insight into the stock. Considering bullish hedge fund sentiment, we recommend buying this stock.
Disclosure: None
