Did Hedge Funds Make The Right Call On CDK Global Inc (CDK)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional 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. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards CDK Global Inc (NASDAQ:CDK) and determine whether hedge funds skillfully traded this stock.

CDK Global Inc (NASDAQ:CDK) has experienced a decrease in enthusiasm from smart money lately. Our calculations also showed that CDK isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

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’ 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 S&P 500 ETFs by 58 percentage points since March 2017 (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.

Jeffrey Gates of Gates Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. Now let’s take a gander at the latest hedge fund action encompassing CDK Global Inc (NASDAQ:CDK).

How have hedgies been trading CDK Global Inc (NASDAQ:CDK)?

Heading into the second quarter of 2020, a total of 24 of the hedge funds tracked by Insider Monkey were long this stock, a change of -4% from the fourth quarter of 2019. On the other hand, there were a total of 23 hedge funds with a bullish position in CDK a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were increasing their stakes considerably (or already accumulated large positions).

Among these funds, International Value Advisers held the most valuable stake in CDK Global Inc (NASDAQ:CDK), which was worth $58.2 million at the end of the third quarter. On the second spot was AQR Capital Management which amassed $24.5 million worth of shares. Harbor Spring Capital, Makaira Partners, and D E Shaw 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 Makaira Partners allocated the biggest weight to CDK Global Inc (NASDAQ:CDK), around 5.11% of its 13F portfolio. International Value Advisers is also relatively very bullish on the stock, earmarking 3.68 percent of its 13F equity portfolio to CDK.

Seeing as CDK Global Inc (NASDAQ:CDK) has experienced falling interest from the aggregate hedge fund industry, we can see that there was a specific group of hedge funds that slashed their entire stakes last quarter. Intriguingly, Jeffrey Gates’s Gates Capital Management dropped the biggest position of the “upper crust” of funds watched by Insider Monkey, valued at an estimated $57.3 million in stock. Anthony Bozza’s fund, Lakewood Capital Management, also cut its stock, about $42.4 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest fell by 1 funds last quarter.

Let’s now take a look at hedge fund activity in other stocks similar to CDK Global Inc (NASDAQ:CDK). These stocks are ITT Inc. (NYSE:ITT), Lancaster Colony Corporation (NASDAQ:LANC), HollyFrontier Corporation (NYSE:HFC), and Telecom Argentina S.A. (NYSE:TEO). This group of stocks’ market valuations match CDK’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.75 hedge funds with bullish positions and the average amount invested in these stocks was $197 million. That figure was $181 million in CDK’s case. ITT Inc. (NYSE:ITT) is the most popular stock in this table. On the other hand Telecom Argentina S.A. (NYSE:TEO) is the least popular one with only 4 bullish hedge fund positions. CDK Global Inc (NASDAQ:CDK) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on CDK as the stock returned 26.5% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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