How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding LKQ Corporation (NASDAQ:LKQ) and determine whether hedge funds had an edge regarding this stock.
LKQ Corporation (NASDAQ:LKQ) investors should be aware of an increase in activity from the world’s largest hedge funds in recent months. LKQ Corporation (NASDAQ:LKQ) was in 44 hedge funds’ portfolios at the end of June. The all time high for this statistics is 52. There were 41 hedge funds in our database with LKQ holdings at the end of March. Our calculations also showed that LKQ isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.
Paul Tudor Jones of Tudor Investment Corp
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Now let’s take a peek at the key hedge fund action surrounding LKQ Corporation (NASDAQ:LKQ).
Hedge fund activity in LKQ Corporation (NASDAQ:LKQ)
Heading into the third quarter of 2020, a total of 44 of the hedge funds tracked by Insider Monkey were long this stock, a change of 7% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in LKQ over the last 20 quarters. With hedgies’ sentiment swirling, there exists an “upper tier” of key hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
More specifically, ValueAct Capital was the largest shareholder of LKQ Corporation (NASDAQ:LKQ), with a stake worth $564.6 million reported as of the end of September. Trailing ValueAct Capital was Southpoint Capital Advisors, which amassed a stake valued at $159.8 million. International Value Advisers, Eminence Capital, and Sachem Head Capital 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 Clearfield Capital allocated the biggest weight to LKQ Corporation (NASDAQ:LKQ), around 17.17% of its 13F portfolio. International Value Advisers is also relatively very bullish on the stock, earmarking 10.59 percent of its 13F equity portfolio to LKQ.
As aggregate interest increased, key money managers have jumped into LKQ Corporation (NASDAQ:LKQ) headfirst. Fairpointe Capital, managed by Thyra Zerhusen, created the largest position in LKQ Corporation (NASDAQ:LKQ). Fairpointe Capital had $15.5 million invested in the company at the end of the quarter. Richard SchimeláandáLawrence Sapanski’s Cinctive Capital Management also made a $3.1 million investment in the stock during the quarter. The following funds were also among the new LKQ investors: Bart Baum’s Ionic Capital Management, Donald Sussman’s Paloma Partners, and Paul Tudor Jones’s Tudor Investment Corp.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as LKQ Corporation (NASDAQ:LKQ) but similarly valued. These stocks are Entegris Inc (NASDAQ:ENTG), NRG Energy Inc (NYSE:NRG), Globe Life Inc. (NYSE:GL), Universal Health Services, Inc. (NYSE:UHS), Paylocity Holding Corp (NASDAQ:PCTY), Regency Centers Corp (NASDAQ:REG), and Generac Holdings Inc. (NYSE:GNRC). This group of stocks’ market values resemble LKQ’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| ENTG | 28 | 601485 | 9 |
| NRG | 36 | 1095466 | -2 |
| GL | 33 | 706101 | 11 |
| UHS | 38 | 446238 | 8 |
| PCTY | 24 | 476733 | -9 |
| REG | 15 | 124124 | -3 |
| GNRC | 36 | 473108 | 7 |
| Average | 30 | 560465 | 3 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 30 hedge funds with bullish positions and the average amount invested in these stocks was $560 million. That figure was $1537 million in LKQ’s case. Universal Health Services, Inc. (NYSE:UHS) is the most popular stock in this table. On the other hand Regency Centers Corp (NASDAQ:REG) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks LKQ Corporation (NASDAQ:LKQ) is more popular among hedge funds. Our overall hedge fund sentiment score for LKQ is 83.4. 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. 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 returned 33% in 2020 through the end of August but still managed to beat the market by 23.2 percentage points. Hedge funds were also right about betting on LKQ as the stock returned 21.1% since the end of June and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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Disclosure: None. This article was originally published at Insider Monkey.
