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Hedge Funds Cashing Out Of 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.

Is LKQ Corporation (NASDAQ:LKQ) an outstanding investment now? Prominent investors are becoming less confident. The number of bullish hedge fund bets went down by 11 lately. Our calculations also showed that LKQ isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). LKQ was in 41 hedge funds’ portfolios at the end of the first quarter of 2020. There were 52 hedge funds in our database with LKQ holdings at the end of the previous quarter.

Video: Watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 44 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Jeff Ubben VALUEACT CAPITAL

Jeffrey Ubben of ValueAct Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, legendary investor Bill Miller told investors to sell 7 extremely popular recession stocks last month. So, we went through his list and recommended another stock with 100% upside potential instead. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to take a gander at the new hedge fund action regarding LKQ Corporation (NASDAQ:LKQ).

How have hedgies been trading LKQ Corporation (NASDAQ:LKQ)?

At the end of the first quarter, a total of 41 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -21% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in LKQ over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, ValueAct Capital was the largest shareholder of LKQ Corporation (NASDAQ:LKQ), with a stake worth $441.9 million reported as of the end of September. Trailing ValueAct Capital was International Value Advisers, which amassed a stake valued at $144.9 million. Southpoint Capital Advisors, Eminence Capital, and Atalan 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 13.04% of its 13F portfolio. International Value Advisers is also relatively very bullish on the stock, setting aside 9.16 percent of its 13F equity portfolio to LKQ.

Since LKQ Corporation (NASDAQ:LKQ) has witnessed a decline in interest from hedge fund managers, it’s safe to say that there was a specific group of hedge funds that decided to sell off their full holdings in the third quarter. At the top of the heap, Greg Poole’s Echo Street Capital Management dumped the biggest investment of the “upper crust” of funds watched by Insider Monkey, worth close to $33.2 million in stock, and Baker Burleson and Stormy Scott’s Banbury Partners was right behind this move, as the fund dropped about $16.1 million worth. These transactions are important to note, as aggregate hedge fund interest fell by 11 funds in the third quarter.

Let’s go over hedge fund activity in other stocks similar to LKQ Corporation (NASDAQ:LKQ). We will take a look at Formula One Group (NASDAQ:FWONK), Encompass Health Corporation (NYSE:EHC), The Interpublic Group of Companies, Inc. (NYSE:IPG), and Charles River Laboratories International Inc. (NYSE:CRL). This group of stocks’ market caps are similar to LKQ’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
FWONK 37 1125200 0
EHC 33 556709 4
IPG 21 594460 -5
CRL 36 862557 4
Average 31.75 784732 0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.75 hedge funds with bullish positions and the average amount invested in these stocks was $785 million. That figure was $1132 million in LKQ’s case. Formula One Group (NASDAQ:FWONK) is the most popular stock in this table. On the other hand The Interpublic Group of Companies, Inc. (NYSE:IPG) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks LKQ Corporation (NASDAQ:LKQ) is more popular among hedge funds. 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 8.3% in 2020 through the end of May but still managed to beat the market by 13.2 percentage points. Hedge funds were also right about betting on LKQ as the stock returned 33.9% so far in Q2 (through the end of May) 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.

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