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Alliance Data Systems Corporation (ADS): Hedge Funds In Wait-and-See Mode

We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds’ top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Alliance Data Systems Corporation (NYSE:ADS).

Alliance Data Systems Corporation (NYSE:ADS) was in 35 hedge funds’ portfolios at the end of September. ADS has seen an increase in support from the world’s most elite money managers in recent months. There were 34 hedge funds in our database with ADS positions at the end of the previous quarter. Our calculations also showed that ADS isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

According to most shareholders, hedge funds are assumed to be unimportant, old financial vehicles of the past. While there are more than 8000 funds in operation at present, Our experts choose to focus on the masters of this group, about 750 funds. These investment experts watch over the majority of the hedge fund industry’s total asset base, and by observing their matchless investments, Insider Monkey has discovered several investment strategies that have historically surpassed Mr. Market. Insider Monkey’s flagship short hedge fund strategy outpaced the S&P 500 short ETFs by around 20 percentage points per annum since its inception in May 2014. Our portfolio of short stocks lost 27.8% since February 2017 (through November 21st) even though the market was up more than 39% during the same period. We just shared a list of 7 short targets in our latest quarterly update .

Jeff Ubben VALUEACT CAPITAL

Jeffrey Ubben of ValueAct Capital

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s view the recent hedge fund action regarding Alliance Data Systems Corporation (NYSE:ADS).

What does smart money think about Alliance Data Systems Corporation (NYSE:ADS)?

At Q3’s end, a total of 35 of the hedge funds tracked by Insider Monkey were long this stock, a change of 3% from the second quarter of 2019. On the other hand, there were a total of 37 hedge funds with a bullish position in ADS a year ago. With hedge funds’ sentiment swirling, there exists a few key hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

No of Hedge Funds with ADS Positions

Among these funds, ValueAct Capital held the most valuable stake in Alliance Data Systems Corporation (NYSE:ADS), which was worth $475.1 million at the end of the third quarter. On the second spot was Lyrical Asset Management which amassed $192.8 million worth of shares. Arlington Value Capital, Citadel Investment Group, and Bridgewater Associates 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 Pacifica Capital Investments allocated the biggest weight to Alliance Data Systems Corporation (NYSE:ADS), around 10.32% of its portfolio. Arlington Value Capital is also relatively very bullish on the stock, dishing out 9.03 percent of its 13F equity portfolio to ADS.

As industrywide interest jumped, some big names were breaking ground themselves. Raging Capital Management, managed by William C. Martin, initiated the biggest position in Alliance Data Systems Corporation (NYSE:ADS). Raging Capital Management had $12 million invested in the company at the end of the quarter. Ravi Chopra’s Azora Capital also made a $10.7 million investment in the stock during the quarter. The other funds with new positions in the stock are Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners, Benjamin A. Smith’s Laurion Capital Management, and Paul Tudor Jones’s Tudor Investment Corp.

Let’s now review hedge fund activity in other stocks similar to Alliance Data Systems Corporation (NYSE:ADS). We will take a look at Robert Half International Inc. (NYSE:RHI), Steel Dynamics, Inc. (NASDAQ:STLD), PVH Corp (NYSE:PVH), and Signature Bank (NASDAQ:SBNY). This group of stocks’ market valuations are closest to ADS’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
RHI 21 577040 -5
STLD 25 515633 -6
PVH 27 1027637 -5
SBNY 32 502279 3
Average 26.25 655647 -3.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.25 hedge funds with bullish positions and the average amount invested in these stocks was $656 million. That figure was $1242 million in ADS’s case. Signature Bank (NASDAQ:SBNY) is the most popular stock in this table. On the other hand Robert Half International Inc. (NYSE:RHI) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks Alliance Data Systems Corporation (NYSE:ADS) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately ADS wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on ADS were disappointed as the stock returned -16.1% during the first two months of the fourth 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 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.

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

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