Do Hedge Funds Love Alliance Data Systems Corporation (ADS)?

In this article we will analyze whether Alliance Data Systems Corporation (NYSE:ADS) is a good investment right now by following the lead of some of the best investors in the world and piggybacking their ideas. There’s no better way to get these firms’ immense resources and analytical capabilities working for us than to follow their lead into their best ideas. While not all of these picks will be winners, our research shows that these picks historically outperformed the market by double digits annually.

Alliance Data Systems Corporation (NYSE:ADS) shareholders have witnessed a decrease in hedge fund sentiment recently. Alliance Data Systems Corporation (NYSE:ADS) was in 31 hedge funds’ portfolios at the end of September. 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. Now let’s take a glance at the key hedge fund action regarding Alliance Data Systems Corporation (NYSE:ADS).

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

At the end of the third quarter, a total of 31 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -9% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in ADS over the last 25 quarters. With the smart money’s sentiment swirling, there exists an “upper tier” of key hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

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, designating 7.53 percent of its 13F equity portfolio to ADS.

Seeing as Alliance Data Systems Corporation (NYSE:ADS) has experienced a decline in interest from the entirety of the hedge funds we track, we can see that there exists a select few money managers that elected to cut their entire stakes in the third quarter. At the top of the heap, Viraj Mehta’s Arctis Global cut the biggest investment of all the hedgies monitored by Insider Monkey, comprising about $139.8 million in stock. James Crichton’s fund, Hitchwood Capital Management, also dumped its stock, about $18.4 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest dropped by 3 funds in the third quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Alliance Data Systems Corporation (NYSE:ADS) but similarly valued. These stocks are 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 values resemble ADS’s market value.

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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 28.6% in 2021 through November 30th and beat the market again by 5.6 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 -15.1% since the end of September (through 11/30) 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 many of these stocks already outperformed the market since 2019.

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