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Ally Financial Inc (ALLY): Hedge Funds Smelled Blood In The Water

Coronavirus is probably the #1 concern in investors’ minds right now. It should be. On February 27th we publish an article with the title “Recession is Imminent: We Need A Travel Ban NOW”. We predicted that a US recession is imminent and US stocks will go down by at least 20% in the next 3-6 months. We also told you to short the market ETFs and buy long-term bonds. Investors who agreed with us and replicated these trades are up double digits whereas the market is down double digits. Our article also called for a total international travel ban to prevent the spread of the coronavirus especially from Europe. We were one step ahead of the markets and the president.

Is Ally Financial Inc (NYSE:ALLY) a good stock to buy right now? We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Ally Financial Inc (NYSE:ALLY) shareholders have witnessed a decrease in support from the world’s most elite money managers lately. Our calculations also showed that ALLY isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 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.

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 41 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 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Howard Marks OAKTREE CAPITAL MANAGEMENT

Howard Marks of Oaktree Capital Management

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. In January, we recommended a long position in one of the most shorted stocks in the market, and that stock returned more than 50% despite the large losses in the market since our recommendation. Now we’re going to review the recent hedge fund action encompassing Ally Financial Inc (NYSE:ALLY).

What have hedge funds been doing with Ally Financial Inc (NYSE:ALLY)?

At Q4’s end, a total of 54 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -2% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in ALLY over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is ALLY A Good Stock To Buy?

Among these funds, Oaktree Capital Management held the most valuable stake in Ally Financial Inc (NYSE:ALLY), which was worth $334.4 million at the end of the third quarter. On the second spot was First Pacific Advisors LLC which amassed $198.8 million worth of shares. GLG Partners, Lakewood Capital Management, and Magnolia Capital Fund 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 Glendon Capital Management allocated the biggest weight to Ally Financial Inc (NYSE:ALLY), around 16.85% of its 13F portfolio. Magnolia Capital Fund is also relatively very bullish on the stock, setting aside 16.78 percent of its 13F equity portfolio to ALLY.

Judging by the fact that Ally Financial Inc (NYSE:ALLY) has faced falling interest from the aggregate hedge fund industry, it’s easy to see that there lies a certain “tier” of hedgies that elected to cut their positions entirely by the end of the third quarter. Interestingly, Ravi Chopra’s Azora Capital dropped the largest position of all the hedgies followed by Insider Monkey, valued at close to $39.1 million in stock. Usman Waheed’s fund, Strycker View Capital, also said goodbye to its stock, about $23.5 million worth. These moves are interesting, as aggregate hedge fund interest dropped by 1 funds by the end of the third quarter.

Let’s also examine hedge fund activity in other stocks similar to Ally Financial Inc (NYSE:ALLY). These stocks are Allegion plc (NYSE:ALLE), Chewy, Inc. (NYSE:CHWY), Alleghany Corporation (NYSE:Y), and Teradyne, Inc. (NYSE:TER). This group of stocks’ market valuations are similar to ALLY’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ALLE 25 502977 -3
CHWY 35 601434 10
Y 24 384460 -4
TER 33 1144237 -1
Average 29.25 658277 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.25 hedge funds with bullish positions and the average amount invested in these stocks was $658 million. That figure was $1810 million in ALLY’s case. Chewy, Inc. (NYSE:CHWY) is the most popular stock in this table. On the other hand Alleghany Corporation (NYSE:Y) is the least popular one with only 24 bullish hedge fund positions. Compared to these stocks Ally Financial Inc (NYSE:ALLY) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 12.9% in 2020 through March 9th and still beat the market by 1.9 percentage points. Unfortunately ALLY wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on ALLY were disappointed as the stock returned -30.7% during the first two months of 2020 (through March 9th) 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 most of these stocks already outperformed the market in Q1.

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

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