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Did Hedge Funds Drop The Ball On CDK Global Inc (CDK) ?

Reputable billionaire investors such as Jim Simons, Cliff Asness and David Tepper generate exorbitant profits for their wealthy accredited investors (a minimum of $1 million in investable assets would be required to invest in a hedge fund and most successful hedge funds won’t accept your savings unless you commit at least $5 million) by pinpointing winning small-cap stocks. There is little or no publicly-available information at all on some of these small companies, which makes it hard for an individual investor to pin down a winner within the small-cap space. However, hedge funds and other big asset managers can do the due diligence and analysis for you instead, thanks to their highly-skilled research teams and vast resources to conduct an appropriate evaluation process. Looking for potential winners within the small-cap galaxy of stocks? We believe following the smart money is a good starting point.

Is CDK Global Inc (NASDAQ:CDK) ready to rally soon? Investors who are in the know are taking a pessimistic view. The number of bullish hedge fund positions dropped by 5 recently. Our calculations also showed that CDK isn’t among the 30 most popular stocks among hedge funds. CDK was in 25 hedge funds’ portfolios at the end of the fourth quarter of 2018. There were 30 hedge funds in our database with CDK positions at the end of the previous quarter.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s flagship best performing hedge funds strategy returned 20.7% year to date (through March 12th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 32 percentage points since its inception (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

D. E. Shaw

We’re going to take a look at the recent hedge fund action regarding CDK Global Inc (NASDAQ:CDK).

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

Heading into the first quarter of 2019, a total of 25 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -17% from the second quarter of 2018. The graph below displays the number of hedge funds with bullish position in CDK over the last 14 quarters. With hedge funds’ capital changing hands, there exists a select group of key hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

CDK

More specifically, Lakewood Capital Management was the largest shareholder of CDK Global Inc (NASDAQ:CDK), with a stake worth $101 million reported as of the end of September. Trailing Lakewood Capital Management was Senator Investment Group, which amassed a stake valued at $67 million. Two Sigma Advisors, D E Shaw, and AQR Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.

Because CDK Global Inc (NASDAQ:CDK) has faced a decline in interest from the entirety of the hedge funds we track, we can see that there were a few funds that decided to sell off their entire stakes heading into Q3. At the top of the heap, John Smith Clark’s Southpoint Capital Advisors said goodbye to the biggest position of the 700 funds watched by Insider Monkey, totaling about $37.5 million in stock. Paul Singer’s fund, Elliott Management, also cut its stock, about $36.2 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 5 funds heading into Q3.

Let’s go over hedge fund activity in other stocks similar to CDK Global Inc (NASDAQ:CDK). We will take a look at PagSeguro Digital Ltd. (NYSE:PAGS), Autoliv Inc. (NYSE:ALV), The Macerich Company (NYSE:MAC), and Encompass Health Corporation (NYSE:EHC). All of these stocks’ market caps are closest to CDK’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PAGS 24 905865 -15
ALV 13 436318 0
MAC 25 250515 -5
EHC 30 418019 5
Average 23 502679 -3.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 23 hedge funds with bullish positions and the average amount invested in these stocks was $503 million. That figure was $443 million in CDK’s case. Encompass Health Corporation (NYSE:EHC) is the most popular stock in this table. On the other hand Autoliv Inc. (NYSE:ALV) is the least popular one with only 13 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. 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 15 most popular stocks among hedge funds returned 21.3% through April 8th and outperformed the S&P 500 ETF (SPY) by more than 5 percentage points. Hedge funds were also right about betting on CDK as the stock returned 23% and outperformed the market as well.

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

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