Did Hedge Funds Catch A Break With Alliance Data Systems Corporation (ADS)?

Technology stocks had a lousy start to 2022. QQQ lost 9% of its value in January. Pandemic winners are getting crushed while energy stocks are surging. Roblox lost 36%, Moderna lost 33%, and Carvana and Shopify lost 30% of their values in January. We aren’t certain about the bubbly technology stocks that trade for ridiculously high multiples of their revenues, but we believe top hedge fund stocks will deliver positive returns for the rest of the year. In this article, we will take a closer look at hedge fund sentiment towards Alliance Data Systems Corporation (NYSE:ADS) at the end of the third quarter and determine whether the smart money was really smart about this stock.

Alliance Data Systems Corporation (NYSE:ADS) investors should be aware of a decrease in hedge fund interest lately. Alliance Data Systems Corporation (NYSE:ADS) was in 31 hedge funds’ portfolios at the end of the third quarter of 2021. The all time high for this statistic is 45. There were 34 hedge funds in our database with ADS holdings at the end of June. Our calculations also showed that ADS isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings).

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium prices have more than doubled over the past year, so we go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. With all of this in mind let’s review the fresh hedge fund action encompassing Alliance Data Systems Corporation (NYSE:ADS).

Do Hedge Funds Think ADS Is A Good Stock To Buy Now?

At Q3’s end, a total of 31 of the hedge funds tracked by Insider Monkey were long this stock, a change of -9% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards ADS over the last 25 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.

More specifically, Palestra Capital Management was the largest shareholder of Alliance Data Systems Corporation (NYSE:ADS), with a stake worth $354.6 million reported as of the end of September. Trailing Palestra Capital Management was Lyrical Asset Management, which amassed a stake valued at $170.4 million. Southpoint Capital Advisors, Arctis Global, and Redwood Capital Management 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 Arctis Global allocated the biggest weight to Alliance Data Systems Corporation (NYSE:ADS), around 21.88% of its 13F portfolio. Palestra Capital Management is also relatively very bullish on the stock, setting aside 7.53 percent of its 13F equity portfolio to ADS.

Judging by the fact that Alliance Data Systems Corporation (NYSE:ADS) has faced bearish sentiment from the aggregate hedge fund industry, it’s easy to see that there was a specific group of money managers who sold off their entire stakes last quarter. Interestingly, Viraj Mehta’s Arctis Global sold off the largest stake of the 750 funds followed by Insider Monkey, worth about $139.8 million in stock, and James Crichton’s Hitchwood Capital Management was right behind this move, as the fund dumped about $18.4 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 3 funds last quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Alliance Data Systems Corporation (NYSE:ADS) but similarly valued. We will take a look at Progyny, Inc. (NASDAQ:PGNY), Flowers Foods, Inc. (NYSE:FLO), The Timken Company (NYSE:TKR), Valmont Industries, Inc. (NYSE:VMI), Hexcel Corporation (NYSE:HXL), The Goodyear Tire & Rubber Company (NASDAQ:GT), and Alkermes Plc (NASDAQ:ALKS). This group of stocks’ market valuations resemble ADS’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.6 hedge funds with bullish positions and the average amount invested in these stocks was $367 million. That figure was $1120 million in ADS’s case. The Goodyear Tire & Rubber Company (NASDAQ:GT) is the most popular stock in this table. On the other hand Flowers Foods, Inc. (NYSE:FLO) is the least popular one with only 19 bullish hedge fund positions. Alliance Data Systems Corporation (NYSE:ADS) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ADS is 56. 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 positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 29.6% in 2021 and beat the market again by 3.6 percentage points. Unfortunately, ADS wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on ADS were disappointed as the stock returned -14% since the end of September (through 1/31) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as all of these stocks already outperformed the market since 2019.

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