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Were Hedge Funds Right About Automatic Data Processing (ADP)?

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Automatic Data Processing, Inc. (NASDAQ:ADP)? The smart money sentiment can provide an answer to this question.

Is Automatic Data Processing, Inc. (NASDAQ:ADP) undervalued? Hedge funds are turning less bullish. The number of long hedge fund bets decreased by 5 in recent months. Our calculations also showed that ADP isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

In the eyes of most market participants, hedge funds are perceived as worthless, old financial vehicles of the past. While there are over 8000 funds with their doors open at present, We look at the crème de la crème of this club, about 850 funds. These hedge fund managers command most of the hedge fund industry’s total asset base, and by watching their inimitable stock picks, Insider Monkey has determined several investment strategies that have historically outperformed the S&P 500 index. Insider Monkey’s flagship short hedge fund strategy defeated the S&P 500 short ETFs by around 20 percentage points per year since its inception in March 2017. Our portfolio of short stocks lost 35.3% since February 2017 (through March 3rd) even though the market was up more than 35% during the same period. We just shared a list of 7 short targets in our latest quarterly update .

David E. Shaw of D.E. Shaw

David E. Shaw of D.E. Shaw

Keeping this in mind let’s take a peek at the key hedge fund action encompassing Automatic Data Processing, Inc. (NASDAQ:ADP).

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

At Q4’s end, a total of 51 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -9% from the third quarter of 2019. By comparison, 42 hedge funds held shares or bullish call options in ADP a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Cedar Rock Capital held the most valuable stake in Automatic Data Processing, Inc. (NASDAQ:ADP), which was worth $509.4 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $368.2 million worth of shares. D E Shaw, Two Sigma Advisors, and BlueSpruce Investments 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 Cedar Rock Capital allocated the biggest weight to Automatic Data Processing, Inc. (NASDAQ:ADP), around 11.53% of its 13F portfolio. BlueSpruce Investments is also relatively very bullish on the stock, earmarking 9.6 percent of its 13F equity portfolio to ADP.

Because Automatic Data Processing, Inc. (NASDAQ:ADP) has faced a decline in interest from the entirety of the hedge funds we track, it’s safe to say that there lies a certain “tier” of money managers that decided to sell off their positions entirely last quarter. Intriguingly, Renaissance Technologies cut the biggest position of the 750 funds followed by Insider Monkey, valued at about $122.8 million in stock. Paul Marshall and Ian Wace’s fund, Marshall Wace LLP, also cut its stock, about $36.3 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest fell by 5 funds last quarter.

Let’s also examine hedge fund activity in other stocks similar to Automatic Data Processing, Inc. (NASDAQ:ADP). We will take a look at Becton, Dickinson and Company (NYSE:BDX), The TJX Companies, Inc. (NYSE:TJX), Ambev SA (NYSE:ABEV), and CME Group Inc (NASDAQ:CME). This group of stocks’ market values are closest to ADP’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BDX 50 1447307 -1
TJX 57 2182820 4
ABEV 14 548416 -5
CME 54 2402338 2
Average 43.75 1645220 0

View table here if you experience formatting issues.

As you can see these stocks had an average of 43.75 hedge funds with bullish positions and the average amount invested in these stocks was $1645 million. That figure was $2822 million in ADP’s case. The TJX Companies, Inc. (NYSE:TJX) is the most popular stock in this table. On the other hand Ambev SA (NYSE:ABEV) is the least popular one with only 14 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. 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 1.0% in 2020 through May 1st but beat the market by 12.9 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 -17.1% during the same time period 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.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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