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Hedge Funds Are Buying Alliance Data Systems Corporation (ADS)

“Value has performed relatively poorly since the 2017 shift, but we believe challenges to the S&P 500’s dominance are mounting and resulting active opportunities away from the index are growing. At some point, this fault line will break, likely on the back of rising rates, and all investors will be reminded that the best time to diversify away from the winners is when it is most painful. The bargain of capturing long-term value may be short-term pain, but enough is eventually enough and it comes time to harvest the benefits.,” said Clearbridge Investments in its market commentary. We aren’t sure whether long-term interest rates will top 5% and value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. That’s why we believe it would be worthwhile to take a look at the hedge fund sentiment on Alliance Data Systems Corporation (NYSE:ADS) in order to identify whether reputable and successful top money managers continue to believe in its potential.

Alliance Data Systems Corporation (NYSE:ADS) shareholders have witnessed an increase in hedge fund interest lately. ADS was in 37 hedge funds’ portfolios at the end of September. There were 32 hedge funds in our database with ADS holdings at the end of the previous quarter. Our calculations also showed that ads isn’t among the 30 most popular stocks among hedge funds.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the market by 18 percentage points since May 2014 through December 3, 2018 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.

VALUEACT CAPITAL

We’re going to take a peek at the latest hedge fund action encompassing Alliance Data Systems Corporation (NYSE:ADS).

How have hedgies been trading Alliance Data Systems Corporation (NYSE:ADS)?

At the end of the third quarter, a total of 37 of the hedge funds tracked by Insider Monkey were long this stock, a change of 16% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards ADS over the last 13 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with ADS Positions

The largest stake in Alliance Data Systems Corporation (NYSE:ADS) was held by ValueAct Capital, which reported holding $1.44 billion worth of stock at the end of September. It was followed by Brave Warrior Capital with a $409.2 million position. Other investors bullish on the company included Arlington Value Capital, Roystone Capital Partners, and Cryder Capital.

With a general bullishness amongst the heavyweights, specific money managers were leading the bulls’ herd. Balyasny Asset Management, managed by Dmitry Balyasny, created the biggest call position in Alliance Data Systems Corporation (NYSE:ADS). Balyasny Asset Management had $17.3 million invested in the company at the end of the quarter. Joel Greenblatt’s Gotham Asset Management also initiated a $10.1 million position during the quarter. The other funds with new positions in the stock are Peter Seuss’s Prana Capital Management, David Costen Haley’s HBK Investments, and Glenn Russell Dubin’s Highbridge Capital Management.

Let’s check out hedge fund activity in other stocks similar to Alliance Data Systems Corporation (NYSE:ADS). These stocks are Barrick Gold Corporation (NYSE:ABX), Vistra Energy Corp. (NYSE:VST), Coca-Cola FEMSA, S.A.B. de C.V. (NYSE:KOF), and Icahn Enterprises LP (NASDAQ:IEP). All of these stocks’ market caps are closest to ADS’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ABX 33 486948 4
VST 38 3596019 -5
KOF 8 474382 -1
IEP 4 12234177 1
Average 20.75 4197882 -0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.75 hedge funds with bullish positions and the average amount invested in these stocks was $4.2 billion. That figure was $2.48 billion in ADS’s case. Vistra Energy Corp. (NYSE:VST) is the most popular stock in this table. On the other hand Icahn Enterprises LP (NASDAQ:IEP) is the least popular one with only 4 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. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard VST might be a better candidate to consider a long position.

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

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