Were Hedge Funds Right About LKQ Corporation (LKQ)?

Asma UL Husna
·6 min read

Many prominent investors, including Warren Buffett, David Tepper and Stan Druckenmiller, have been cautious regarding the current bull market and missed out as the stock market reached another high in recent weeks. On the other hand, technology hedge funds weren't timid and registered double digit market beating gains. Financials, energy and industrial stocks aren't doing great but many of the stocks that delivered strong returns since March are still going very strong and hedge funds actually increased their positions in these stocks. In this article we will find out how hedge fund sentiment to LKQ Corporation (NASDAQ:LKQ) changed recently.

LKQ Corporation (NASDAQ:LKQ) shareholders have witnessed an increase in support from the world's most elite money managers of late. LKQ Corporation (NASDAQ:LKQ) was in 44 hedge funds' portfolios at the end of the second quarter of 2020. The all time high for this statistics is 52. There were 41 hedge funds in our database with LKQ positions at the end of the first quarter. Our calculations also showed that LKQ 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). 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 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Bart Baum of Ionic Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. 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. Now we're going to check out the recent hedge fund action encompassing LKQ Corporation (NASDAQ:LKQ).

Hedge fund activity in LKQ Corporation (NASDAQ:LKQ)

At the end of June, a total of 44 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 7% from the first quarter of 2020. Below, you can check out the change in hedge fund sentiment towards LKQ over the last 20 quarters. With the smart money's sentiment swirling, there exists an "upper tier" of notable hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

More specifically, ValueAct Capital was the largest shareholder of LKQ Corporation (NASDAQ:LKQ), with a stake worth $564.6 million reported as of the end of September. Trailing ValueAct Capital was Southpoint Capital Advisors, which amassed a stake valued at $159.8 million. International Value Advisers, Eminence Capital, and Sachem Head 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 17.17% of its 13F portfolio. International Value Advisers is also relatively very bullish on the stock, earmarking 10.59 percent of its 13F equity portfolio to LKQ.

As aggregate interest increased, some big names have jumped into LKQ Corporation (NASDAQ:LKQ) headfirst. Fairpointe Capital, managed by Thyra Zerhusen, initiated the most outsized position in LKQ Corporation (NASDAQ:LKQ). Fairpointe Capital had $15.5 million invested in the company at the end of the quarter. Richard SchimeláandáLawrence Sapanski's Cinctive Capital Management also made a $3.1 million investment in the stock during the quarter. The other funds with brand new LKQ positions are Bart Baum's Ionic Capital Management, Donald Sussman's Paloma Partners, and Paul Tudor Jones's Tudor Investment Corp.

Let's go over hedge fund activity in other stocks similar to LKQ Corporation (NASDAQ:LKQ). We will take a look at Entegris Inc (NASDAQ:ENTG), NRG Energy Inc (NYSE:NRG), Globe Life Inc. (NYSE:GL), Universal Health Services, Inc. (NYSE:UHS), Paylocity Holding Corp (NASDAQ:PCTY), Regency Centers Corp (NASDAQ:REG), and Generac Holdings Inc. (NYSE:GNRC). All of these stocks' market caps match LKQ's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ENTG,28,601485,9 NRG,36,1095466,-2 GL,33,706101,11 UHS,38,446238,8 PCTY,24,476733,-9 REG,15,124124,-3 GNRC,36,473108,7 Average,30,560465,3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 30 hedge funds with bullish positions and the average amount invested in these stocks was $560 million. That figure was $1537 million in LKQ's case. Universal Health Services, Inc. (NYSE:UHS) is the most popular stock in this table. On the other hand Regency Centers Corp (NASDAQ:REG) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks LKQ Corporation (NASDAQ:LKQ) is more popular among hedge funds. Our overall hedge fund sentiment score for LKQ is 83.4. 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. 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 30% in 2020 through October 23rd but still managed to beat the market by 21 percentage points. Hedge funds were also right about betting on LKQ as the stock returned 25.5% since the end of June (through 10/23) 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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