Was The Smart Money Right About LKQ Corporation (LKQ)?

In this article you are going to find out whether hedge funds think LKQ Corporation (NASDAQ:LKQ) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

LKQ Corporation (NASDAQ:LKQ) was in 50 hedge funds’ portfolios at the end of December. The all time high for this statistic is 52. LKQ shareholders have witnessed a decrease in enthusiasm from smart money of late. There were 51 hedge funds in our database with LKQ holdings at the end of September. Our calculations also showed that LKQ isn’t among the 30 most popular stocks among hedge funds (click for Q4 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’ 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 124 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.

Scott Ferguson of Sachem Head Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best hydrogen fuel cell stocks to pick the next Tesla that will deliver a 10x return. 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. You can subscribe to our free daily newsletter on our homepage. With all of this in mind let’s check out the fresh hedge fund action surrounding LKQ Corporation (NASDAQ:LKQ).

Do Hedge Funds Think LKQ Is A Good Stock To Buy Now?

At fourth quarter’s end, a total of 50 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -2% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in LKQ over the last 22 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in LKQ Corporation (NASDAQ:LKQ) was held by ValueAct Capital, which reported holding $759.3 million worth of stock at the end of December. It was followed by Eminence Capital with a $155.6 million position. Other investors bullish on the company included Sachem Head Capital, Atalan Capital, and International Value Advisers. In terms of the portfolio weights assigned to each position Clearfield Capital allocated the biggest weight to LKQ Corporation (NASDAQ:LKQ), around 13.33% of its 13F portfolio. International Value Advisers is also relatively very bullish on the stock, setting aside 11.57 percent of its 13F equity portfolio to LKQ.

Since LKQ Corporation (NASDAQ:LKQ) has experienced falling interest from the entirety of the hedge funds we track, logic holds that there is a sect of money managers that elected to cut their positions entirely in the fourth quarter. At the top of the heap, Clint Murray’s Lodge Hill Capital dropped the largest stake of the 750 funds tracked by Insider Monkey, valued at an estimated $10.2 million in stock, and David Harding’s Winton Capital Management was right behind this move, as the fund sold off about $0.6 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 1 funds in the fourth quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as LKQ Corporation (NASDAQ:LKQ) but similarly valued. We will take a look at Allegion plc (NYSE:ALLE), Lumen Technologies, Inc. (NYSE:LUMN), Advance Auto Parts, Inc. (NYSE:AAP), Zynga Inc (NASDAQ:ZNGA), News Corp (NASDAQ:NWSA), Teva Pharmaceutical Industries Limited (NYSE:TEVA), and Cna Financial Corporation (NYSE:CNA). This group of stocks’ market valuations are similar to LKQ’s market valuation.

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As you can see these stocks had an average of 31.1 hedge funds with bullish positions and the average amount invested in these stocks was $808 million. That figure was $1611 million in LKQ’s case. Zynga Inc (NASDAQ:ZNGA) is the most popular stock in this table. On the other hand Cna Financial Corporation (NYSE:CNA) is the least popular one with only 16 bullish hedge fund positions. LKQ Corporation (NASDAQ:LKQ) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for LKQ is 80.1. 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 90.7% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 35 percentage points. These stocks gained 13.6% in 2021 through April 30th and still beat the market by 1.6 percentage points. Hedge funds were also right about betting on LKQ as the stock returned 32.5% since the end of Q4 (through 4/30) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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