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Were Hedge Funds Right About Souring On ADT Inc. (ADT)?

Nina Todic

Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 750 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about ADT Inc. (NYSE:ADT).

ADT Inc. (NYSE:ADT) shareholders have witnessed a decrease in support from the world's most elite money managers lately. ADT was in 15 hedge funds' portfolios at the end of December. There were 19 hedge funds in our database with ADT positions at the end of the previous quarter. Our calculations also showed that adt isn't among the 30 most popular stocks among hedge funds.

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 32 percentage points since May 2014 through March 12, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.5% through March 12, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Alexander Roepers, Atlantic Investment Management

Let's check out the new hedge fund action regarding ADT Corp (NYSE:ADT).

How are hedge funds trading ADT Inc. (NYSE:ADT)?

At the end of the fourth quarter, a total of 15 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -21% from the previous quarter. On the other hand, there were a total of 19 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 key hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

No of Hedge Funds with ADT Positions

Among these funds, SQN Investors held the most valuable stake in ADT Inc. (NYSE:ADT), which was worth $30.8 million at the end of the third quarter. On the second spot was Greenhouse Funds which amassed $11 million worth of shares. Moreover, GLG Partners, Arrowstreet Capital, and Atlantic Investment Management were also bullish on ADT Inc. (NYSE:ADT), allocating a large percentage of their portfolios to this stock.

Since ADT Inc. (NYSE:ADT) has experienced bearish sentiment from the smart money, logic holds that there lies a certain "tier" of hedgies that decided to sell off their positions entirely last quarter. At the top of the heap, Anand Parekh's Alyeska Investment Group said goodbye to the largest investment of the "upper crust" of funds tracked by Insider Monkey, valued at an estimated $21.4 million in call options, and Wilmot B. Harkey and Daniel Mack's Nantahala Capital Management was right behind this move, as the fund said goodbye to about $18.8 million worth. These transactions are important to note, as aggregate hedge fund interest was cut by 4 funds last quarter.

Let's now take a look at hedge fund activity in other stocks similar to ADT Inc. (NYSE:ADT). These stocks are BRF S.A. (NYSE:BRFS), Acuity Brands, Inc. (NYSE:AYI), Cypress Semiconductor Corporation (NASDAQ:CY), and Huntsman Corporation (NYSE:HUN). This group of stocks' market values match ADT's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BRFS,9,48699,-1 AYI,27,848812,-8 CY,23,220139,-1 HUN,26,464407,-5 Average,21.25,395514,-3.75 [/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 $396 million. That figure was $62 million in ADT's case. Acuity Brands, Inc. (NYSE:AYI) is the most popular stock in this table. On the other hand BRF S.A. (NYSE:BRFS) is the least popular one with only 9 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. 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 15 most popular stocks among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Unfortunately ADT wasn't in this group. Hedge funds that bet on ADT were disappointed as the stock returned 11.4% and underperformed the market. If you are interested in investing in large cap stocks, you should check out the top 15 hedge fund stocks as 13 of these outperformed the market.

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

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