We are still in an overall bull market and many stocks that smart money investors were piling into surged in 2019. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained more than 57% each. Hedge funds’ top 3 stock picks returned 44.6% this year and beat the S&P 500 ETFs by almost 14 percentage points. That’s a big deal. This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Is Ally Financial Inc (NYSE:ALLY) going to take off soon? Money managers are in a bullish mood. The number of long hedge fund bets inched up by 8 lately. Our calculations also showed that ALLY isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 rankings). ALLY was in 51 hedge funds’ portfolios at the end of the third quarter of 2019. There were 43 hedge funds in our database with ALLY holdings at the end of the previous quarter.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Howard Marks of Oaktree Capital Management
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius’ weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock already gained 20 percent. With all of this in mind let’s go over the fresh hedge fund action surrounding Ally Financial Inc (NYSE:ALLY).
How have hedgies been trading Ally Financial Inc (NYSE:ALLY)?
At the end of the third quarter, a total of 51 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 19% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards ALLY over the last 17 quarters. With hedgies’ sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Oaktree Capital Management, managed by Howard Marks, holds the biggest position in Ally Financial Inc (NYSE:ALLY). Oaktree Capital Management has a $362.9 million position in the stock, comprising 7.1% of its 13F portfolio. The second largest stake is held by First Pacific Advisors, led by Robert Rodriguez and Steven Romick, holding a $212 million position; 2% of its 13F portfolio is allocated to the stock. Remaining hedge funds and institutional investors with similar optimism encompass Anthony Bozza’s Lakewood Capital Management, Noam Gottesman’s GLG Partners and Adam Peterson’s Magnolia Capital Fund. In terms of the portfolio weights assigned to each position Glendon Capital Management allocated the biggest weight to Ally Financial Inc (NYSE:ALLY), around 16.29% of its 13F portfolio. Magnolia Capital Fund is also relatively very bullish on the stock, designating 14.98 percent of its 13F equity portfolio to ALLY.
As one would reasonably expect, key hedge funds have been driving this bullishness. Azora Capital, managed by Ravi Chopra, created the most outsized position in Ally Financial Inc (NYSE:ALLY). Azora Capital had $39.1 million invested in the company at the end of the quarter. Usman Waheed’s Strycker View Capital also initiated a $23.5 million position during the quarter. The following funds were also among the new ALLY investors: George Soros’s Soros Fund Management, Dmitry Balyasny’s Balyasny Asset Management, and Gregg Moskowitz’s Interval Partners.
Let’s also examine hedge fund activity in other stocks similar to Ally Financial Inc (NYSE:ALLY). We will take a look at Icahn Enterprises LP (NASDAQ:IEP), Slack Technologies Inc (NYSE:WORK), Gartner Inc (NYSE:IT), and CBOE Holdings, Inc (NASDAQ:CBOE). This group of stocks’ market valuations are closest to ALLY’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| IEP | 5 | 12357565 | 0 |
| WORK | 27 | 326449 | -10 |
| IT | 19 | 659624 | 2 |
| CBOE | 23 | 1076442 | -1 |
| Average | 18.5 | 3605020 | -2.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 18.5 hedge funds with bullish positions and the average amount invested in these stocks was $3605 million. That figure was $2112 million in ALLY’s case. Slack Technologies Inc (NYSE:WORK) is the most popular stock in this table. On the other hand Icahn Enterprises LP (NASDAQ:IEP) is the least popular one with only 5 bullish hedge fund positions. Compared to these stocks Ally Financial Inc (NYSE:ALLY) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on ALLY, though not to the same extent, as the stock returned 39% during the same period and outperformed the market as well.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
