RiverPark Large Growth Fund recently published its Q1 Investor Letter in which the fund discussed its quarterly performance and investment thesis on Alliance Data Systems Corporation (NYSE: ADS) and other companies. We’ve already discussed Amazon.com, Adobe Systems, Booking Holdings, MasterCard, Adidas AG, and Dollar Tree. In this article, we’ll focus on the fund’s thesis on Alliance Data Systems, which provides data-driven marketing and loyalty solutions.
So, here is what RiverPark thinks about ADS which was one of the top detractors for the fund in the first quarter.
ADS was also a top detractor as the company continues to work through several near-term issues in each of its Rewards, Epsilon and Card Services divisions. While we believe that each of the challenges in these divisions will clear in the coming quarters (for example, 2Q18 should be an inflection point in the company’s charge off and delinquency trends in its Card Services division), investor patience has worn thin as management has, on several occasions, pushed out its expectations for a re-acceleration in its business. We have trimmed our ADS position on several occasions over the past several quarters for this same reason and did again this quarter.
ADS has a terrific long-term record of increasing revenue, EBITDA, and earnings at solid double-digit rates (13%, 12%, and 17% for revenue, EBITDA, and earnings, respectively, over the last 10 years) and we believe that each of its businesses has the potential to continue that trend as credit losses normalize, the company’s core lending business continues to grow and the company’s advertising and rewards divisions rebound (due to the ramp up of new programs, as well as improved execution). In addition, as a result of its recent poor performance ADS shares trade at a well below market multiple of 8x next year’s EPS, a significant discount to the company’s long-term growth rate, the Russell 1000 Growth Index’s forward multiple of 18x and the company’s historical multiple (ADS shares last traded at 8x in 2010). To the extent the business begins to rebound later this year, we would look to add to our position as earnings growth coupled with multiple expansion would be a powerful combination to drive ADS’s shares higher.
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Plano, Texas-based Alliance Data Systems Corporation (NYSE: ADS) is a global provider of data-driven marketing and loyalty solutions. The company allows its clients to create and increase customer loyalty through solutions that engage customers across multiple touch points using traditional, digital, mobile and emerging technologies. The company consists of three businesses that together employ approximately 20,000 associates at more than 100 locations worldwide.
On the share market, Alliance Data Systems hasn’t performing well this year. If we look at charts, the company’s stock has been declining consistently since January, falling more than 17% year to date. ADS has declined 9.41% over the past three months and 11.36% over the past 12 months.
Meanwhile, a number of hedge funds covered by Insider Monkey also see a value in Alliance Data Systems. As of the end of 2017, there were 41 funds in our database with positions in the company.
The writing was kind of on the wall at the end of March. S&P 500 Index was near the 4600 level whereas inflation rate was close to 8% and the 10-year Treasury yield jumped to 2.7%. The probability of further increases in interest rates and sharp declines in the stock market was much larger than the probability of further gains in stock prices. So, we started telling our premium subscribers to short the market at the end of March. Most hedge funds interpreted the macro developments the same way we did and reduced their exposure. The total value of stock holdings in hedge funds’ portfolios went down from $3.1 trillion at the end of December to $2.8 trillion at the end of March.
This isn’t a terribly large reduction in market exposure, but it is still a reduction. It still shows that hedge funds have a slight edge in market timing.
Insider Monkey has long been a believer of imitating the top stock picks of hedge funds, and this approach has helped us beat the market on average over the last several years.
Warren Buffett never mentions this but he is one of the first hedge fund managers who unlocked the secrets of successful stock market investing. He launched his hedge fund in 1956 with $105,100 in seed capital. Back then they weren’t called hedge funds, they were called “partnerships”. Warren Buffett took 25% of all returns in excess of 6 percent.
For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
As you can guess, Warren Buffett’s #1 wealth building strategy is to generate high returns in the 20% to 30% range.
We see several investors trying to strike it rich in options market by risking their entire savings. You can get rich by returning 20% per year and compounding that for several years. Warren Buffett has been investing and compounding for at least 65 years.
So, how did Warren Buffett manage to generate high returns and beat the market?
In a free sample issue of our monthly newsletter we analyzed Warren Buffett’s stock picks covering the 1999-2017 period and identified the best performing stocks in Warren Buffett’s portfolio. This is basically a recipe to generate better returns than Warren Buffett is achieving himself.
You can enter your email below to get our FREE report. In the same report you can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12-24 months. We initially share this idea in October 2018 and the stock already returned more than 150%. We still like this investment.
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