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Should I Avoid ADT Inc. (ADT)?

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·6 min read
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Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts usually don't make them change their opinion towards a company. This time it may be different. The coronavirus pandemic destroyed the high correlations among major industries and asset classes. We are now in a stock pickers market where fundamentals of a stock have more effect on the price than the overall direction of the market. As a result we observe sudden and large changes in hedge fund positions depending on the news flow. Let’s take a look at the hedge fund sentiment towards ADT Inc. (NYSE:ADT) to find out whether there were any major changes in hedge funds' views.

ADT Inc. (NYSE:ADT) was in 16 hedge funds' portfolios at the end of the first quarter of 2021. The all time high for this statistic is 30. ADT has experienced a decrease in hedge fund sentiment recently. There were 24 hedge funds in our database with ADT positions at the end of the fourth quarter. Our calculations also showed that ADT isn't among the 30 most popular stocks among hedge funds (click for Q1 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 S&P 500 ETFs by more than 115 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

Jamie Zimmerman of Litespeed Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 15 best Jim Cramer stocks to identify the next Tesla that will deliver outsized returns. 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 homepage. Now let's go over the latest hedge fund action regarding ADT Inc. (NYSE:ADT).

Do Hedge Funds Think ADT Is A Good Stock To Buy Now?

At first quarter's end, a total of 16 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -33% from one quarter earlier. On the other hand, there were a total of 20 hedge funds with a bullish position in ADT a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were upping their stakes substantially (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Bill Miller's Miller Value Partners has the biggest position in ADT Inc. (NYSE:ADT), worth close to $110.1 million, amounting to 2.8% of its total 13F portfolio. On Miller Value Partners's heels is Bruce Emery of Greenvale Capital, with a $73.5 million position; the fund has 8% of its 13F portfolio invested in the stock. Other professional money managers that are bullish consist of David Einhorn's Greenlight Capital, Cliff Asness's AQR Capital Management and Hari Hariharan's NWI Management. In terms of the portfolio weights assigned to each position Litespeed Management allocated the biggest weight to ADT Inc. (NYSE:ADT), around 12.02% of its 13F portfolio. Greenvale Capital is also relatively very bullish on the stock, setting aside 8 percent of its 13F equity portfolio to ADT.

Judging by the fact that ADT Inc. (NYSE:ADT) has witnessed bearish sentiment from the smart money, it's safe to say that there exists a select few hedge funds that decided to sell off their entire stakes in the first quarter. Intriguingly, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital sold off the largest stake of the "upper crust" of funds tracked by Insider Monkey, totaling an estimated $19.3 million in stock, and Michael Kaufman's MAK Capital One was right behind this move, as the fund said goodbye to about $10.3 million worth. These moves are interesting, as total hedge fund interest dropped by 8 funds in the first quarter.

Let's now review hedge fund activity in other stocks - not necessarily in the same industry as ADT Inc. (NYSE:ADT) but similarly valued. We will take a look at Axalta Coating Systems Ltd (NYSE:AXTA), Arrowhead Pharmaceuticals Inc. (NASDAQ:ARWR), Redfin Corporation (NASDAQ:RDFN), Hanesbrands Inc. (NYSE:HBI), Ballard Power Systems Inc. (NASDAQ:BLDP), MINISO Group Holding Limited (NYSE:MNSO), and GW Pharmaceuticals plc (NASDAQ:GWPH). This group of stocks' market values are similar to ADT's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AXTA,43,1563342,-3 ARWR,20,151598,-4 RDFN,18,434551,-3 HBI,32,977516,5 BLDP,18,125641,-2 MNSO,12,87616,-6 GWPH,40,2735520,23 Average,26.1,867969,1.4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.1 hedge funds with bullish positions and the average amount invested in these stocks was $868 million. That figure was $284 million in ADT's case. Axalta Coating Systems Ltd (NYSE:AXTA) is the most popular stock in this table. On the other hand MINISO Group Holding Limited (NYSE:MNSO) is the least popular one with only 12 bullish hedge fund positions. ADT Inc. (NYSE:ADT) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for ADT is 19.5. 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. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 28.5% in 2021 through July 23rd and still beat the market by 10.1 percentage points. A small number of hedge funds were also right about betting on ADT as the stock returned 24.1% since the end of the first quarter (through 7/23) and outperformed the market by an even larger margin.

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Disclosure: None. This article was originally published at Insider Monkey.