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Were Hedge Funds Right About Ditching Automatic Data Processing, Inc. (ADP)?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thought Automatic Data Processing, Inc. (NASDAQ:ADP) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

Automatic Data Processing, Inc. (NASDAQ:ADP) has seen a decrease in support from the world’s most elite money managers of late. ADP was in 46 hedge funds’ portfolios at the end of the first quarter of 2020. There were 51 hedge funds in our database with ADP positions at the end of the previous quarter. 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.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 58 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 scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s check out the recent hedge fund action encompassing Automatic Data Processing, Inc. (NASDAQ:ADP).

How have hedgies been trading Automatic Data Processing, Inc. (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. Below, you can check out the change in hedge fund sentiment towards ADP over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Of the funds tracked by Insider Monkey, Cedar Rock Capital, managed by Andy Brown, holds the most valuable position in Automatic Data Processing, Inc. (NASDAQ:ADP). Cedar Rock Capital has a $395 million position in the stock, comprising 10.6% of its 13F portfolio. The second largest stake is held by Tim Hurd and Ed Magnus of BlueSpruce Investments, with a $246.3 million position; 8.4% of its 13F portfolio is allocated to the company. Remaining professional money managers with similar optimism 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, Inc. (NASDAQ:ADP), around 10.57% of its 13F portfolio. BlueSpruce Investments is also relatively very bullish on the stock, setting aside 8.36 percent of its 13F equity portfolio to ADP.

Judging by the fact that Automatic Data Processing, Inc. (NASDAQ:ADP) has experienced declining sentiment from the aggregate hedge fund industry, it’s easy to see that there lies a certain “tier” of fund managers that slashed their entire stakes by the end of the first quarter. Interestingly, David Blood and Al Gore’s Generation Investment Management cut the largest stake of all the hedgies watched by Insider Monkey, worth 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 was cut by 5 funds by the end of the first quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Automatic Data Processing, Inc. (NASDAQ:ADP). 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 valuations are closest to ADP’s market valuation.

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, Inc. (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 12.3% in 2020 through June 30th and surpassed the market by 15.5 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 9.6% 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.