Is Automatic Data Processing (ADP) A Good Stock To Buy?

The financial regulations require hedge funds and wealthy investors that exceeded the $100 million equity holdings threshold to file a report that shows their positions at the end of every quarter. Even though it isn’t the intention, these filings to a certain extent level the playing field for ordinary investors. The latest round of 13F filings disclosed the funds’ positions on March 31st, about a week after the S&P 500 Index bottomed. We at Insider Monkey have made an extensive database of more than 821 of those established hedge funds and famous value investors’ filings. In this article, we analyze how these elite funds and prominent investors traded Automatic Data Processing (NASDAQ:ADP) based on those filings.

Automatic Data Processing (NASDAQ:ADP) investors should be aware of a decrease in activity from the world’s largest hedge funds lately. Our calculations also showed that ADP 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).

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 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

John Overdeck of Two Sigma

John Overdeck of Two Sigma Advisors

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, we are still not out of the woods in terms of the coronavirus pandemic. So, we checked out this successful trader’s “corona catalyst plays“. 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 the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s review the fresh hedge fund action encompassing Automatic Data Processing (NASDAQ:ADP).

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

At Q1’s end, a total of 46 of the hedge funds tracked by Insider Monkey were long this stock, a change of -10% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in ADP over the last 18 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists an “upper tier” of key hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).

Is ADP A Good Stock To Buy?

When looking at the institutional investors followed by Insider Monkey, Cedar Rock Capital, managed by Andy Brown, holds the largest position in Automatic Data Processing (NASDAQ:ADP). Cedar Rock Capital has a $395 million position in the stock, comprising 10.6% of its 13F portfolio. Coming in second is BlueSpruce Investments, managed by Tim Hurd and Ed Magnus, which holds a $246.3 million position; the fund has 8.4% of its 13F portfolio invested in the stock. Remaining peers that hold long positions encompass D. E. Shaw’s D E Shaw, John Overdeck and David Siegel’s Two Sigma Advisors and Guardian Capital’s GuardCap Asset Management. In terms of the portfolio weights assigned to each position Cedar Rock Capital allocated the biggest weight to Automatic Data Processing (NASDAQ:ADP), around 10.57% of its 13F portfolio. BlueSpruce Investments is also relatively very bullish on the stock, earmarking 8.36 percent of its 13F equity portfolio to ADP.

Because Automatic Data Processing (NASDAQ:ADP) has faced falling interest from the entirety of the hedge funds we track, we can see that there were a few hedge funds who were dropping their full holdings by the end of the third quarter. It’s worth mentioning that David Blood and Al Gore’s Generation Investment Management said goodbye to the biggest position of the “upper crust” of funds watched by Insider Monkey, valued at an estimated $242.5 million in stock, and Mikal Patel’s Oribel Capital Management was right behind this move, as the fund dumped about $36.7 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest fell by 5 funds by the end of the third quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Automatic Data Processing (NASDAQ:ADP) but similarly valued. We will take a look at Enbridge Inc (NYSE:ENB), Allergan plc (NYSE:AGN), Intuitive Surgical, Inc. (NASDAQ:ISRG), and The TJX Companies, Inc. (NYSE:TJX). This group of stocks’ market values resemble ADP’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ENB 25 297504 4
AGN 95 12598171 9
ISRG 50 964310 -1
TJX 69 1966466 12
Average 59.75 3956613 6

View table here if you experience formatting issues.

As you can see these stocks had an average of 59.75 hedge funds with bullish positions and the average amount invested in these stocks was $3957 million. That figure was $1445 million in ADP’s case. Allergan plc (NYSE:AGN) is the most popular stock in this table. On the other hand Enbridge Inc (NYSE:ENB) is the least popular one with only 25 bullish hedge fund positions. Automatic Data Processing (NASDAQ:ADP) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 7.9% in 2020 through May 22nd and surpassed the market by 15.6 percentage points. Unfortunately ADP wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); ADP investors were disappointed as the stock returned -1.3% during the second quarter 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 most of these stocks already outperformed the market in 2020.

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