2019 Review: Top Hedge Fund Stocks vs. Automatic Data Processing (ADP)

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 Automatic Data Processing (NASDAQ:ADP) changed recently.

Automatic Data Processing (NASDAQ:ADP) investors should pay attention to an increase in hedge fund interest of late. Our calculations also showed that ADP 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).

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 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

David E. Shaw of D.E. Shaw

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. Now let’s take a glance at the key hedge fund action regarding Automatic Data Processing (NASDAQ:ADP).

Hedge fund activity in Automatic Data Processing (NASDAQ:ADP)

At the end of the third quarter, a total of 49 of the hedge funds tracked by Insider Monkey were long this stock, a change of 14% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in ADP over the last 17 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Cedar Rock Capital held the most valuable stake in Automatic Data Processing (NASDAQ:ADP), which was worth $483.4 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $388.4 million worth of shares. D E Shaw, Generation Investment Management, and Two Sigma Advisors 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 Cedar Rock Capital allocated the biggest weight to Automatic Data Processing (NASDAQ:ADP), around 11.2% of its 13F portfolio. BlueSpruce Investments is also relatively very bullish on the stock, designating 8.12 percent of its 13F equity portfolio to ADP.

As one would reasonably expect, key hedge funds were leading the bulls’ herd. BlueSpruce Investments, managed by Tim Hurd and Ed Magnus, assembled the biggest position in Automatic Data Processing (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 following funds were also among the new ADP investors: Peter Seuss’s Prana Capital Management, Perella Weinberg Partners, and Ray Dalio’s Bridgewater Associates.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Automatic Data Processing (NASDAQ:ADP) but similarly valued. We will take a look at 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 caps match ADP’s market cap.

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 (NASDAQ:ADP) 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 ADP, though not to the same extent, as the stock returned 32.3% during the same period and outperformed the market as well.

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.