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Were Hedge Funds Right About Automatic Data Processing (ADP)?

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In this article you are going to find out whether hedge funds think Automatic Data Processing, Inc. (NASDAQ:ADP) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It's not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Is Automatic Data Processing, Inc. (NASDAQ:ADP) a healthy stock for your portfolio? Hedge funds were betting on the stock. The number of bullish hedge fund positions improved by 6 lately. Automatic Data Processing, Inc. (NASDAQ:ADP) was in 48 hedge funds' portfolios at the end of the fourth quarter of 2020. The all time high for this statistic is 56. Our calculations also showed that ADP isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings).

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 124 percentage points since March 2017 (see the details here). That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Ian Wace Marshall Wace
Ian Wace Marshall Wace

Ian Wace of Marshall Wace

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best hydrogen fuel cell stocks to pick the next Tesla that will deliver a 10x return. 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. With all of this in mind let's take a look at the new hedge fund action encompassing Automatic Data Processing, Inc. (NASDAQ:ADP).

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

Heading into the first quarter of 2021, a total of 48 of the hedge funds tracked by Insider Monkey were long this stock, a change of 14% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards ADP over the last 22 quarters. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Automatic Data Processing, Inc. (NASDAQ:ADP) was held by Fundsmith LLP, which reported holding $1248.8 million worth of stock at the end of December. It was followed by Cedar Rock Capital with a $465.4 million position. Other investors bullish on the company included GuardCap Asset Management, Two Sigma Advisors, and Arrowstreet Capital. 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 10.06% of its 13F portfolio. Heathbridge Capital Management is also relatively very bullish on the stock, earmarking 4.76 percent of its 13F equity portfolio to ADP.

As one would reasonably expect, some big names have been driving this bullishness. Lunia Capital, managed by Vikas Lunia, created the most outsized position in Automatic Data Processing, Inc. (NASDAQ:ADP). Lunia Capital had $11.5 million invested in the company at the end of the quarter. Jinghua Yan's TwinBeech Capital also initiated a $9.3 million position during the quarter. The following funds were also among the new ADP investors: Peter Muller's PDT Partners, Paul Marshall and Ian Wace's Marshall Wace LLP, and Dmitry Balyasny's Balyasny Asset Management.

Let's also examine 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 Cigna Corporation (NYSE:CI), Snap Inc. (NYSE:SNAP), Baidu, Inc. (NASDAQ:BIDU), Prologis Inc (NYSE:PLD), Colgate-Palmolive Company (NYSE:CL), Petroleo Brasileiro S.A. - Petrobras (NYSE:PBR), and Gilead Sciences, Inc. (NASDAQ:GILD). All of these stocks' market caps are similar to ADP's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CI,57,2578300,-5 SNAP,63,4610841,12 BIDU,51,4634061,8 PLD,36,655443,3 CL,46,1515874,-1 PBR,24,1335976,-7 GILD,72,2021867,11 Average,49.9,2478909,3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 49.9 hedge funds with bullish positions and the average amount invested in these stocks was $2479 million. That figure was $3065 million in ADP's case. Gilead Sciences, Inc. (NASDAQ:GILD) is the most popular stock in this table. On the other hand Petroleo Brasileiro S.A. - Petrobras (NYSE:PBR) is the least popular one with only 24 bullish hedge fund positions. Automatic Data Processing, Inc. (NASDAQ:ADP) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for ADP is 60.7. 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. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 90.7% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 35 percentage points. These stocks gained 13.6% in 2021 through April 30th and surpassed the market again by 1.6 percentage points. Unfortunately ADP wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); ADP investors were disappointed as the stock returned 6.7% since the end of December (through 4/30) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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

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