There are several ways to beat the market, and investing in small cap stocks has historically been one of them. We like to improve the odds of beating the market further by examining what famous hedge fund operators such as Jeff Ubben, George Soros and Carl Icahn think. Those hedge fund operators make billions of dollars each year by hiring the best and the brightest to do research on stocks, including small cap stocks that big brokerage houses simply don’t cover. Because of Carl Icahn and other elite funds’ exemplary historical records, we pay attention to their small cap picks. In this article, we use hedge fund filing data to analyze Alliance Data Systems Corporation (NYSE:ADS).
Is Alliance Data Systems Corporation (NYSE:ADS) a buy right now? Investors who are in the know are taking a pessimistic view. The number of bullish hedge fund positions retreated by 1 lately. Our calculations also showed that ADS isn’t among the 30 most popular stocks among hedge funds. ADS was in 38 hedge funds’ portfolios at the end of the first quarter of 2019. There were 39 hedge funds in our database with ADS holdings at the end of the previous quarter.
To most stock holders, hedge funds are viewed as worthless, outdated investment vehicles of yesteryear. While there are over 8000 funds in operation at present, Our experts choose to focus on the elite of this group, approximately 750 funds. These investment experts have their hands on bulk of all hedge funds’ total asset base, and by paying attention to their highest performing picks, Insider Monkey has unearthed many investment strategies that have historically surpassed the market. Insider Monkey’s flagship hedge fund strategy outperformed the S&P 500 index by around 5 percentage points per year since its inception in May 2014 through the end of May. We were able to generate large returns even by identifying short candidates. Our portfolio of short stocks lost 30.9% since February 2017 (through May 30th) even though the market was up nearly 24% during the same period. We just shared a list of 5 short targets in our latest quarterly update and they are already down an average of 11.9% in less than a couple of weeks whereas our long picks outperformed the market by 2 percentage points in this volatile 2 week period.
We’re going to take a peek at the recent hedge fund action encompassing Alliance Data Systems Corporation (NYSE:ADS).
How have hedgies been trading Alliance Data Systems Corporation (NYSE:ADS)?
Heading into the second quarter of 2019, a total of 38 of the hedge funds tracked by Insider Monkey were long this stock, a change of -3% from the previous quarter. By comparison, 35 hedge funds held shares or bullish call options in ADS a year ago. With the smart money’s sentiment swirling, there exists a few notable hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).
Of the funds tracked by Insider Monkey, ValueAct Capital, managed by Jeffrey Ubben, holds the largest position in Alliance Data Systems Corporation (NYSE:ADS). ValueAct Capital has a $911.2 million position in the stock, comprising 10% of its 13F portfolio. Coming in second is Allan Mecham and Ben Raybould of Arlington Value Capital, with a $198.1 million position; the fund has 14% of its 13F portfolio invested in the stock. Remaining members of the smart money that hold long positions encompass Glenn Greenberg’s Brave Warrior Capital, Ken Griffin’s Citadel Investment Group and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital.
Since Alliance Data Systems Corporation (NYSE:ADS) has witnessed bearish sentiment from hedge fund managers, we can see that there was a specific group of hedgies that slashed their entire stakes heading into Q3. At the top of the heap, Richard Barrera’s Roystone Capital Partners said goodbye to the biggest investment of all the hedgies monitored by Insider Monkey, totaling an estimated $36.5 million in call options, and Michael Gelband’s ExodusPoint Capital was right behind this move, as the fund dumped about $10.5 million worth. These bearish behaviors are important to note, as total hedge fund interest was cut by 1 funds heading into Q3.
Let’s check out hedge fund activity in other stocks similar to Alliance Data Systems Corporation (NYSE:ADS). These stocks are MarketAxess Holdings Inc. (NASDAQ:MKTX), Arconic Inc. (NYSE:ARNC), EQT Midstream Partners LP (NYSE:EQM), and PVH Corp (NYSE:PVH). This group of stocks’ market values are similar to ADS’s market value.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 22 hedge funds with bullish positions and the average amount invested in these stocks was $1026 million. That figure was $1907 million in ADS’s case. Arconic Inc. (NYSE:ARNC) is the most popular stock in this table. On the other hand EQT Midstream Partners LP (NYSE:EQM) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Alliance Data Systems Corporation (NYSE:ADS) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Unfortunately ADS wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on ADS were disappointed as the stock returned -19.3% during the same period 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 13 of these stocks already outperformed the market in Q2.
Disclosure: None. This article was originally published at Insider Monkey.