Hedge Funds Don’t Like ADT Inc. (ADT) At All

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the second quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 5 years and analyze what the smart money thinks of ADT Inc. (NYSE:ADT) based on that data and determine whether they were really smart about the stock.

Hedge fund interest in ADT Inc. (NYSE:ADT) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that ADT isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). At the end of this article we will also compare ADT to other stocks including Adaptive Biotechnologies Corporation (NASDAQ:ADPT), Zai Lab Limited (NASDAQ:ZLAB), and Jazz Pharmaceuticals Plc (NASDAQ:JAZZ) to get a better sense of its popularity.

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 56 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.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, 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 real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers after its stock price crashed. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind let’s go over the latest hedge fund action regarding ADT Inc. (NYSE:ADT).

How have hedgies been trading ADT Inc. (NYSE:ADT)?

At Q2’s end, a total of 20 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the first quarter of 2020. On the other hand, there were a total of 20 hedge funds with a bullish position in ADT a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Miller Value Partners, managed by Bill Miller, holds the largest position in ADT Inc. (NYSE:ADT). Miller Value Partners has a $118.4 million position in the stock, comprising 5.3% of its 13F portfolio. Sitting at the No. 2 spot is Joe Milano of Greenhouse Funds, with a $32.1 million position; the fund has 4.8% of its 13F portfolio invested in the stock. Some other professional money managers that hold long positions consist of Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital, Cliff Asness’s AQR Capital Management and Jeremy Carton and Gilbert Li’s Alta Fundamental Advisers. In terms of the portfolio weights assigned to each position Alta Fundamental Advisers allocated the biggest weight to ADT Inc. (NYSE:ADT), around 7.35% of its 13F portfolio. Miller Value Partners is also relatively very bullish on the stock, earmarking 5.26 percent of its 13F equity portfolio to ADT.

Seeing as ADT Inc. (NYSE:ADT) has experienced declining sentiment from the entirety of the hedge funds we track, we can see that there were a few money managers who were dropping their full holdings in the second quarter. Interestingly, Mike Vranos’s Ellington dropped the largest stake of the “upper crust” of funds tracked by Insider Monkey, valued at an estimated $0.9 million in stock. Paul Tudor Jones’s fund, Tudor Investment Corp, also dumped its stock, about $0.6 million worth. These moves are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now review hedge fund activity in other stocks similar to ADT Inc. (NYSE:ADT). We will take a look at Adaptive Biotechnologies Corporation (NASDAQ:ADPT), Zai Lab Limited (NASDAQ:ZLAB), Jazz Pharmaceuticals Plc (NASDAQ:JAZZ), Ares Capital Corporation (NASDAQ:ARCC), National Retail Properties, Inc. (NYSE:NNN), Lumentum Holdings Inc (NASDAQ:LITE), and Smartsheet Inc. (NYSE:SMAR). All of these stocks’ market caps resemble ADT’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 30.6 hedge funds with bullish positions and the average amount invested in these stocks was $1030 million. That figure was $207 million in ADT’s case. Smartsheet Inc. (NYSE:SMAR) is the most popular stock in this table. On the other hand National Retail Properties, Inc. (NYSE:NNN) is the least popular one with only 17 bullish hedge fund positions. ADT Inc. (NYSE:ADT) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for ADT is 33.6. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 24.8% in 2020 through the end of September and surpassed the market by 19.3 percentage points. Unfortunately ADT wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); ADT investors were disappointed as the stock returned 2.8% in the third 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.

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