Many investors, including Paul Tudor Jones or Stan Druckenmiller, have been saying before last year's Q4 market crash that the stock market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates. In the first half of 2019, most investors recovered all of their Q4 losses as sentiment shifted and optimism dominated the US China trade negotiations. Nevertheless, many of the stocks that delivered strong returns in the first half still sport strong fundamentals and their gains were more related to the general market sentiment rather than their individual performance and hedge funds kept their bullish stance. In this article we will find out how hedge fund sentiment to LKQ Corporation (NASDAQ:LKQ) changed recently.
Is LKQ Corporation (NASDAQ:LKQ) a safe stock to buy now? Hedge funds are reducing their bets on the stock. The number of long hedge fund positions shrunk by 4 in recent months. Our calculations also showed that LKQ 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).
In today’s marketplace there are numerous formulas investors put to use to grade stocks. Two of the less known formulas are hedge fund and insider trading signals. Our researchers have shown that, historically, those who follow the best picks of the best money managers can outperform the market by a solid margin (see the details here).
[caption id="attachment_30493" align="alignnone" width="600"] Jeffrey Ubben of ValueAct Capital[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. 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 already gained 20 percent. Keeping this in mind let's view the latest hedge fund action surrounding LKQ Corporation (NASDAQ:LKQ).
What does smart money think about LKQ Corporation (NASDAQ:LKQ)?
Heading into the fourth quarter of 2019, a total of 41 of the hedge funds tracked by Insider Monkey were long this stock, a change of -9% from the previous quarter. On the other hand, there were a total of 45 hedge funds with a bullish position in LKQ a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, ValueAct Capital held the most valuable stake in LKQ Corporation (NASDAQ:LKQ), which was worth $504.2 million at the end of the third quarter. On the second spot was Southpoint Capital Advisors which amassed $169.8 million worth of shares. International Value Advisers, D E Shaw, and Atalan Capital 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 Clearfield Capital allocated the biggest weight to LKQ Corporation (NASDAQ:LKQ), around 16.09% of its 13F portfolio. 12th Street Asset Management is also relatively very bullish on the stock, designating 8.64 percent of its 13F equity portfolio to LKQ.
Due to the fact that LKQ Corporation (NASDAQ:LKQ) has faced falling interest from the smart money, we can see that there is a sect of funds that elected to cut their entire stakes in the third quarter. Interestingly, Lee Hicks and Jan Koerner's Park Presidio Capital sold off the biggest position of the "upper crust" of funds followed by Insider Monkey, totaling about $53.2 million in stock. Robert Pitts's fund, Steadfast Capital Management, also dropped its stock, about $36.3 million worth. These transactions are important to note, as total hedge fund interest dropped by 4 funds in the third quarter.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as LKQ Corporation (NASDAQ:LKQ) but similarly valued. We will take a look at Allegion plc (NYSE:ALLE), Aqua America Inc (NYSE:WTR), StoneCo Ltd. (NASDAQ:STNE), and Apache Corporation (NYSE:APA). This group of stocks' market valuations match LKQ's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ALLE,26,450412,2 WTR,33,832797,12 STNE,28,1337452,1 APA,26,692560,4 Average,28.25,828305,4.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 28.25 hedge funds with bullish positions and the average amount invested in these stocks was $828 million. That figure was $1409 million in LKQ's case. Aqua America Inc (NYSE:WTR) is the most popular stock in this table. On the other hand Allegion plc (NYSE:ALLE) is the least popular one with only 26 bullish hedge fund positions. Compared to these stocks LKQ Corporation (NASDAQ:LKQ) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on LKQ as the stock returned 50.8% so far in 2019 (through 12/23) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations. 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.