Was The Smart Money Right About Crowding Into Ally Financial Inc (ALLY)?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (Recession is Imminent: We Need A Travel Ban NOW). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Ally Financial Inc (NYSE:ALLY).

Is Ally Financial Inc (NYSE:ALLY) a safe stock to buy now? The smart money was taking a bullish view. The number of bullish hedge fund positions moved up by 9 lately. Ally Financial Inc (NYSE:ALLY) was in 54 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 57. Our calculations also showed that ALLY isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 45 hedge funds in our database with ALLY positions at the end of the first quarter.

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 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 S&P 500 ETFs by 58 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 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.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world 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 to get excerpts of these letters in your inbox. Keeping this in mind we’re going to take a look at the new hedge fund action encompassing Ally Financial Inc (NYSE:ALLY).

How are hedge funds trading Ally Financial Inc (NYSE:ALLY)?

At second quarter’s end, a total of 54 of the hedge funds tracked by Insider Monkey were long this stock, a change of 20% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in ALLY over the last 20 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Ally Financial Inc (NYSE:ALLY) was held by Oaktree Capital Management, which reported holding $283.9 million worth of stock at the end of September. It was followed by Platinum Asset Management with a $151.3 million position. Other investors bullish on the company included Adage Capital Management, Magnolia Capital Fund, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Punch Card Capital allocated the biggest weight to Ally Financial Inc (NYSE:ALLY), around 28.78% of its 13F portfolio. Magnolia Capital Fund is also relatively very bullish on the stock, setting aside 19.88 percent of its 13F equity portfolio to ALLY.

Now, key money managers were breaking ground themselves. HG Vora Capital Management, managed by Parag Vora, initiated the most valuable position in Ally Financial Inc (NYSE:ALLY). HG Vora Capital Management had $49.6 million invested in the company at the end of the quarter. Brandon Haley’s Holocene Advisors also made a $45 million investment in the stock during the quarter. The following funds were also among the new ALLY investors: David Rosen’s Rubric Capital Management, Kenneth Mario Garschina’s Mason Capital Management, and Dan Kamensky’s Marble Ridge Capital.

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as Ally Financial Inc (NYSE:ALLY) but similarly valued. We will take a look at Credit Acceptance Corp. (NASDAQ:CACC), Livongo Health, Inc. (NASDAQ:LVGO), Formula One Group (NASDAQ:FWONK), WestRock Company (NYSE:WRK), BorgWarner Inc. (NYSE:BWA), Vail Resorts, Inc. (NYSE:MTN), and Hill-Rom Holdings, Inc. (NYSE:HRC). This group of stocks’ market valuations match ALLY’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 34.6 hedge funds with bullish positions and the average amount invested in these stocks was $813 million. That figure was $1636 million in ALLY’s case. Formula One Group (NASDAQ:FWONK) is the most popular stock in this table. On the other hand Credit Acceptance Corp. (NASDAQ:CACC) is the least popular one with only 23 bullish hedge fund positions. Compared to these stocks Ally Financial Inc (NYSE:ALLY) is more popular among hedge funds. Our overall hedge fund sentiment score for ALLY is 88.4. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks returned 30% in 2020 through October 23rd but still managed to beat the market by 21 percentage points. Hedge funds were also right about betting on ALLY as the stock returned 48% since the end of June (through 10/23) 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.

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