Was The Smart Money Wrong About Automatic Data Processing, Inc. (ADP)?

While the market driven by short-term sentiment influenced by the accomodative interest rate environment in the US, virus news and stimulus talks, many smart money investors are starting to get cautious towards the current bull run since March and hedging or reducing many of their long positions. Some fund managers are betting on Dow hitting 30,000 to generate strong returns. However, as we know, big investors usually buy stocks with strong fundamentals that can deliver gains both in bull and bear markets, which is why we believe we can profit from imitating them. In this article, we are going to take a look at the smart money sentiment surrounding Automatic Data Processing, Inc. (NASDAQ:ADP).

Automatic Data Processing, Inc. (NASDAQ:ADP) has experienced an increase in hedge fund sentiment in recent months. Automatic Data Processing (NASDAQ:ADP) was in 49 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 56. There were 46 hedge funds in our database with ADP holdings at the end of March. Our calculations also showed that ADP 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 56 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

David Siegel of Two Sigma Advisors

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 best high dividend stocks to buy to identify solid dividend stocks trading at rock bottom prices. 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 website to get excerpts of these letters in your inbox. Now we’re going to take a peek at the recent hedge fund action surrounding Automatic Data Processing, Inc. (NASDAQ:ADP).

How are hedge funds trading Automatic Data Processing, Inc. (NASDAQ:ADP)?

Heading into the third quarter of 2020, a total of 49 of the hedge funds tracked by Insider Monkey were long this stock, a change of 7% from the first quarter of 2020. By comparison, 43 hedge funds held shares or bullish call options in ADP a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were increasing their holdings significantly (or already accumulated large positions).

The largest stake in Automatic Data Processing, Inc. (NASDAQ:ADP) was held by Cedar Rock Capital, which reported holding $432.3 million worth of stock at the end of September. It was followed by D E Shaw with a $303.7 million position. Other investors bullish on the company included BlueSpruce Investments, Two Sigma Advisors, and GuardCap Asset Management. 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 10.52% of its 13F portfolio. BlueSpruce Investments is also relatively very bullish on the stock, designating 7.59 percent of its 13F equity portfolio to ADP.

Now, some big names have been driving this bullishness. Citadel Investment Group, managed by Ken Griffin, established the largest position in Automatic Data Processing, Inc. (NASDAQ:ADP). Citadel Investment Group had $30.9 million invested in the company at the end of the quarter. Renaissance Technologies also initiated a $23.6 million position during the quarter. The following funds were also among the new ADP investors: Seth Cogswell’s Running Oak Capital, Paul Tudor Jones’s Tudor Investment Corp, and Daniel Beltzman and Gergory Smith’s Birch Run Capital.

Let’s go over hedge fund activity in other stocks similar to Automatic Data Processing, Inc. (NASDAQ:ADP). We will take a look at Regeneron Pharmaceuticals Inc (NASDAQ:REGN), Canadian National Railway Company (NYSE:CNI), Colgate-Palmolive Company (NYSE:CL), China Petroleum & Chemical Corp (NYSE:SNP), Equinix Inc (REIT) (NASDAQ:EQIX), Advanced Micro Devices, Inc. (NASDAQ:AMD), and Enbridge Inc (NYSE:ENB). This group of stocks’ market values resemble ADP’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 37.9 hedge funds with bullish positions and the average amount invested in these stocks was $1541 million. That figure was $1802 million in ADP’s case. Advanced Micro Devices, Inc. (NASDAQ:AMD) is the most popular stock in this table. On the other hand China Petroleum & Chemical Corp (NYSE:SNP) is the least popular one with only 10 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 overall hedge fund sentiment score for ADP is 81.8. 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. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 30% in 2020 through October 23rd and beat the market by 21 percentage points. Unfortunately ADP wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on ADP were disappointed as the stock returned 0.9% since the end of June (through 10/23) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.

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