How Alliance Data Systems Corporation (ADS) Stacks Up Against Its Peers

After a lengthy stretch of outperformance, small-cap stocks suffered from July 2015 through June 2016, as heightened global economic fears led investors to flee to the safe havens of large-cap stocks and other instruments. Those stocks outperformed small-caps by about 10 percentage points during that time, with small-cap healthcare stocks being particularly hard hit. However, the tide has since turned in a big way, as evidenced by small-caps toppling their large-cap peers by 5 percentage points in the third quarter, and by another 5 percentage points in the first seven weeks of the fourth quarter. In this article, we’ll analyze how this shift affected hedge funds’ Q3 trading of Alliance Data Systems Corporation (NYSE:ADS) and see how the stock is affected by the recent hedge fund activity.

Is Alliance Data Systems Corporation (NYSE:ADS) a buy right now? The smart money is taking a pessimistic view. The number of long hedge fund positions were cut by 1 recently. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Motorola Solutions Inc (NYSE:MSI), Quest Diagnostics Inc (NYSE:DGX), and Cenovus Energy Inc (USA) (NYSE:CVE) to gather more data points.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

What does the smart money think about Alliance Data Systems Corporation (NYSE:ADS)?

Heading into the fourth quarter of 2016, a total of 32 of the hedge funds tracked by Insider Monkey were long this stock, a drop of 3% from the second quarter of 2016, and the second straight quarter with a slight dip in ownership. With hedgies’ capital changing hands, there exists a select group of notable hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, ValueAct Capital, managed by Jeffrey Ubben, holds the most valuable position in Alliance Data Systems Corporation (NYSE:ADS). According to regulatory filings, the fund has a $1.07 billion position in the stock, comprising 9.3% of its 13F portfolio. The second largest stake is held by Citadel Investment Group, managed by Ken Griffin, which holds a $48.4 million position. Some other hedge funds and institutional investors that are bullish contain Neil Chriss’ Hutchin Hill Capital, Richard McGuire’s Marcato Capital Management, and Paul Tudor Jones’ Tudor Investment Corp.

Since Alliance Data Systems Corporation (NYSE:ADS) has witnessed a decline in interest from the entirety of the hedge funds we track, we can see that there is a sect of fund managers that decided to sell off their full holdings last quarter. Interestingly, Barry Rosenstein’s JANA Partners cut the biggest investment of all the hedgies followed by Insider Monkey, comprising about $132.3 million in stock. Steve Cohen’s fund, Point72 Asset Management, also sold off its stock, about $31.1 million worth of ADS shares. These bearish behaviors are important to note, as aggregate hedge fund interest fell by 1 fund last quarter.

Let’s go over 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 Motorola Solutions Inc (NYSE:MSI), Quest Diagnostics Inc (NYSE:DGX), Cenovus Energy Inc (USA) (NYSE:CVE), and Oneok Partners LP (NYSE:OKS). This group of stocks’ market values are similar to ADS’s market value.

As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $480 million. That figure was $1.48 billion in ADS’ case. Motorola Solutions Inc (NYSE:MSI) is the most popular stock in this table. On the other hand Oneok Partners LP (NYSE:OKS) is the least popular one with only 9 bullish hedge fund positions. Compared to these stocks Alliance Data Systems Corporation (NYSE:ADS) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers, it may be a good idea to analyze it in detail and potentially include it in your portfolio.

Disclosure: None