Is ADS A Good Stock To Buy According To Hedge Funds?

In this article you are going to find out whether hedge funds think Alliance Data Systems Corporation (NYSE:ADS) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Is ADS a good stock to buy? Alliance Data Systems Corporation (NYSE:ADS) investors should be aware of an increase in support from the world’s most elite money managers lately. Alliance Data Systems Corporation (NYSE:ADS) was in 36 hedge funds’ portfolios at the end of September. The all time high for this statistic is 45. There were 29 hedge funds in our database with ADS positions at the end of the second quarter. Our calculations also showed that ADS isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 66 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

David Harding

David Harding of Winton Capital Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, the House passed a landmark bill decriminalizing marijuana. So, we are checking out this under the radar cannabis stock right now. We go through lists like the 15 best blue chip stocks to buy to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website. Now we’re going to take a peek at the key hedge fund action encompassing Alliance Data Systems Corporation (NYSE:ADS).

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

At Q3’s end, a total of 36 of the hedge funds tracked by Insider Monkey were long this stock, a change of 24% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards ADS over the last 21 quarters. With hedgies’ capital changing hands, there exists a select group of key hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

The largest stake in Alliance Data Systems Corporation (NYSE:ADS) was held by Redwood Capital Management, which reported holding $78.4 million worth of stock at the end of September. It was followed by Lyrical Asset Management with a $74.9 million position. Other investors bullish on the company included D E Shaw, AQR Capital Management, and Arrowstreet Capital. In terms of the portfolio weights assigned to each position Redwood Capital Management allocated the biggest weight to Alliance Data Systems Corporation (NYSE:ADS), around 5.96% of its 13F portfolio. Pacifica Capital Investments is also relatively very bullish on the stock, designating 3.7 percent of its 13F equity portfolio to ADS.

As one would reasonably expect, specific money managers were breaking ground themselves. Redwood Capital Management, managed by Jonathan Kolatch, established the biggest position in Alliance Data Systems Corporation (NYSE:ADS). Redwood Capital Management had $78.4 million invested in the company at the end of the quarter. John Smith Clark’s Southpoint Capital Advisors also made a $11.3 million investment in the stock during the quarter. The other funds with new positions in the stock are Gregg Moskowitz’s Interval Partners, Israel Englander’s Millennium Management, and David Harding’s Winton Capital Management.

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. These stocks are Spirit AeroSystems Holdings, Inc. (NYSE:SPR), BancorpSouth Bank (NYSE:BXS), Insight Enterprises, Inc. (NASDAQ:NSIT), Lions Gate Entertainment Corporation (NYSE:LGF-B), BRP Group, Inc. (NASDAQ:BRP), Materialise NV (NASDAQ:MTLS), and FS KKR Capital Corp. (NYSE:FSK). This group of stocks’ market valuations are similar to ADS’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SPR 31 468951 -6
BXS 19 33217 9
NSIT 22 66764 2
LGF-B 22 246159 -4
BRP 10 45833 -6
MTLS 5 7404 1
FSK 11 89179 0
Average 17.1 136787 -0.6

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.1 hedge funds with bullish positions and the average amount invested in these stocks was $137 million. That figure was $427 million in ADS’s case. Spirit AeroSystems Holdings, Inc. (NYSE:SPR) is the most popular stock in this table. On the other hand Materialise NV (NASDAQ:MTLS) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Alliance Data Systems Corporation (NYSE:ADS) is more popular among hedge funds. Our overall hedge fund sentiment score for ADS is 84. 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. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks returned 33.3% in 2020 through December 18th but still managed to beat the market by 16.4 percentage points. Hedge funds were also right about betting on ADS as the stock returned 70.8% since the end of September (through 12/18) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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