We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do (like Peltz's recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Automatic Data Processing, Inc. (NASDAQ:ADP).
Is Automatic Data Processing, Inc. (NASDAQ:ADP) a bargain? Money managers are betting on the stock. The number of long hedge fund positions improved by 6 lately. Our calculations also showed that ADP isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to 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 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_26397" align="aligncenter" width="473"] Ray Dalio of Bridgewater Associates[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. We're going to analyze the new hedge fund action encompassing Automatic Data Processing, Inc. (NASDAQ:ADP).
Hedge fund activity in Automatic Data Processing, Inc. (NASDAQ:ADP)
At the end of the third quarter, a total of 49 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 14% from the previous quarter. By comparison, 35 hedge funds held shares or bullish call options in ADP a year ago. With hedge funds' sentiment swirling, there exists an "upper tier" of noteworthy hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).
The largest stake in Automatic Data Processing, Inc. (NASDAQ:ADP) was held by Cedar Rock Capital, which reported holding $483.4 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $388.4 million position. Other investors bullish on the company included D E Shaw, Generation Investment Management, and Two Sigma Advisors. In terms of the portfolio weights assigned to each position Cedar Rock Capital allocated the biggest weight to Automatic Data Processing, Inc. (NASDAQ:ADP), around 11.2% of its portfolio. BlueSpruce Investments is also relatively very bullish on the stock, earmarking 8.12 percent of its 13F equity portfolio to ADP.
With a general bullishness amongst the heavyweights, some big names were breaking ground themselves. BlueSpruce Investments, managed by Tim Hurd and Ed Magnus, established the biggest position in Automatic Data Processing, Inc. (NASDAQ:ADP). BlueSpruce Investments had $211.1 million invested in the company at the end of the quarter. Michael Kharitonov and Jon David McAuliffe's Voleon Capital also made a $15 million investment in the stock during the quarter. The other funds with new positions in the stock are Peter Seuss's Prana Capital Management, Perella Weinberg Partners, and Ray Dalio's Bridgewater Associates.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Automatic Data Processing, Inc. (NASDAQ:ADP) but similarly valued. These stocks are Duke Energy Corporation (NYSE:DUK), The Bank of Nova Scotia (NYSE:BNS), BlackRock, Inc. (NYSE:BLK), and Intuit Inc. (NASDAQ:INTU). This group of stocks' market valuations resemble ADP's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position DUK,28,1316998,-4 BNS,15,677866,-1 BLK,42,1040933,-1 INTU,47,2011283,1 Average,33,1261770,-1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 33 hedge funds with bullish positions and the average amount invested in these stocks was $1262 million. That figure was $3101 million in ADP's case. Intuit Inc. (NASDAQ:INTU) is the most popular stock in this table. On the other hand The Bank of Nova Scotia (NYSE:BNS) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks Automatic Data Processing, Inc. (NASDAQ:ADP) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 34.7% in 2019 through November 22nd and outperformed the S&P 500 ETF (SPY) by 8.5 percentage points. Hedge funds were also right about betting on ADP, though not to the same extent, as the stock returned 5.1% during the fourth quarter (through 11/22) and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.