2019 Review: Top Hedge Fund Stocks vs. CDK Global Inc (CDK)
While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, increasing oil prices and deteriorating expectations towards the resolution of the trade war with China, many smart money investors kept their cautious approach regarding the current bull run in the third quarter and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 40,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding CDK Global Inc (NASDAQ:CDK) and see how the stock performed in comparison to hedge funds' consensus picks.
CDK Global Inc (NASDAQ:CDK) was in 28 hedge funds' portfolios at the end of the third quarter of 2019. CDK investors should pay attention to a decrease in hedge fund sentiment of late. There were 29 hedge funds in our database with CDK holdings at the end of the previous quarter. Our calculations also showed that CDK isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings).
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
[caption id="attachment_30621" align="aligncenter" width="487"]
Cliff Asness of AQR Capital Management[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock is still extremely cheap despite already gaining 20 percent. With all of this in mind we're going to review the fresh hedge fund action encompassing CDK Global Inc (NASDAQ:CDK).
Hedge fund activity in CDK Global Inc (NASDAQ:CDK)
At the end of the third quarter, a total of 28 of the hedge funds tracked by Insider Monkey were long this stock, a change of -3% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards CDK over the last 17 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.
Among these funds, Lakewood Capital Management held the most valuable stake in CDK Global Inc (NASDAQ:CDK), which was worth $93.3 million at the end of the third quarter. On the second spot was Gates Capital Management which amassed $71.4 million worth of shares. D E Shaw, AQR Capital Management, and International Value Advisers were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Lakewood Capital Management allocated the biggest weight to CDK Global Inc (NASDAQ:CDK), around 3.18% of its 13F portfolio. Gates Capital Management is also relatively very bullish on the stock, setting aside 3.09 percent of its 13F equity portfolio to CDK.
Since CDK Global Inc (NASDAQ:CDK) has witnessed declining sentiment from the smart money, we can see that there lies a certain "tier" of hedgies who sold off their positions entirely in the third quarter. Interestingly, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital dumped the largest stake of the 750 funds monitored by Insider Monkey, totaling about $35.1 million in stock, and Paul Tudor Jones's Tudor Investment Corp was right behind this move, as the fund dumped about $3.6 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest was cut by 1 funds in the third quarter.
Let's also examine hedge fund activity in other stocks similar to CDK Global Inc (NASDAQ:CDK). We will take a look at Enel Chile S.A. (NYSE:ENIC), Wix.Com Ltd (NASDAQ:WIX), Versum Materials, Inc. (NYSE:VSM), and Gardner Denver Holdings, Inc. (NYSE:GDI). This group of stocks' market valuations match CDK's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ENIC,8,26016,2 WIX,31,986992,5 VSM,31,1007124,-5 GDI,15,379484,-9 Average,21.25,599904,-1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.25 hedge funds with bullish positions and the average amount invested in these stocks was $600 million. That figure was $473 million in CDK's case. Wix.Com Ltd (NASDAQ:WIX) is the most popular stock in this table. On the other hand Enel Chile S.A. (NYSE:ENIC) is the least popular one with only 8 bullish hedge fund positions. CDK Global Inc (NASDAQ:CDK) is not the most popular stock in this group but hedge fund interest is still above average. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Unfortunately CDK wasn't nearly as popular as these 20 stocks and hedge funds that were betting on CDK were disappointed as the stock returned 15.6% in 2019 and trailed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
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