Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we publish an article with the title “Recession is Imminent: We Need A Travel Ban NOW”. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. With the first-quarter round of 13F filings behind us it is time to take a look at the stocks in which some of the best money managers in the world preferred to invest or sell heading into the second quarter. One of these stocks was Automatic Data Processing, Inc. (NASDAQ:ADP).
Automatic Data Processing, Inc. (NASDAQ:ADP) has seen a decrease in activity from the world’s largest hedge funds of late. ADP was in 51 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 56 hedge funds in our database with ADP positions at the end of the previous quarter. Our calculations also showed that ADP isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
Video: Click the image to 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 41 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.
John Overdeck of Two Sigma Advisors
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. In January, we recommended a long position in one of the most shorted stocks in the market, and that stock returned more than 50% despite the large losses in the market since our recommendation. Keeping this in mind we’re going to check out the fresh hedge fund action encompassing Automatic Data Processing, Inc. (NASDAQ:ADP).
What have hedge funds been doing with Automatic Data Processing, Inc. (NASDAQ:ADP)?
At Q4’s end, a total of 51 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -9% from the previous quarter. On the other hand, there were a total of 42 hedge funds with a bullish position in ADP a year ago. With the smart money’s sentiment swirling, there exists a few notable hedge fund managers who were adding to their stakes considerably (or already accumulated large positions).
The largest stake in Automatic Data Processing, Inc. (NASDAQ:ADP) was held by Cedar Rock Capital, which reported holding $509.4 million worth of stock at the end of September. It was followed by Arrowstreet Capital with a $368.2 million position. Other investors bullish on the company included D E Shaw, Two Sigma Advisors, and BlueSpruce Investments. 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 11.53% of its 13F portfolio. BlueSpruce Investments is also relatively very bullish on the stock, designating 9.6 percent of its 13F equity portfolio to ADP.
Seeing as Automatic Data Processing, Inc. (NASDAQ:ADP) has witnessed bearish sentiment from the entirety of the hedge funds we track, it’s easy to see that there was a specific group of hedgies who sold off their full holdings by the end of the third quarter. Interestingly, Renaissance Technologies dumped the biggest investment of the “upper crust” of funds tracked by Insider Monkey, comprising about $122.8 million in stock, and Paul Marshall and Ian Wace’s Marshall Wace LLP was right behind this move, as the fund sold off about $36.3 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest dropped by 5 funds by the end of the third quarter.
Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Automatic Data Processing, Inc. (NASDAQ:ADP) but similarly valued. We will take a look at Becton, Dickinson and Company (NYSE:BDX), The TJX Companies, Inc. (NYSE:TJX), Ambev SA (NYSE:ABEV), and CME Group Inc (NASDAQ:CME). All of these stocks’ market caps are similar to ADP’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| BDX | 50 | 1447307 | -1 |
| TJX | 57 | 2182820 | 4 |
| ABEV | 14 | 548416 | -5 |
| CME | 54 | 2402338 | 2 |
| Average | 43.75 | 1645220 | 0 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 43.75 hedge funds with bullish positions and the average amount invested in these stocks was $1645 million. That figure was $2822 million in ADP’s case. The TJX Companies, Inc. (NYSE:TJX) is the most popular stock in this table. On the other hand Ambev SA (NYSE:ABEV) is the least popular one with only 14 bullish hedge fund positions. Automatic Data Processing, Inc. (NASDAQ:ADP) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 12.9% in 2020 through March 9th but still beat the market by 1.9 percentage points. Hedge funds were also right about betting on ADP as the stock returned -11.5% during the first quarter (through March 9th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.
