Hedge Funds Dumped Alliance Data Systems Corporation (ADS) Big Time

In this article we will check out the progression of hedge fund sentiment towards Alliance Data Systems Corporation (NYSE:ADS) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Is Alliance Data Systems Corporation (NYSE:ADS) worth your attention right now? Prominent investors are taking a bearish view. The number of bullish hedge fund positions were trimmed by 15 lately. Our calculations also showed that ADS isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

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 S&P 500 ETFs by more than 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. 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.

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out trades like this one. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind we’re going to view the new hedge fund action regarding Alliance Data Systems Corporation (NYSE:ADS).

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

At Q1’s end, a total of 30 of the hedge funds tracked by Insider Monkey were long this stock, a change of -33% from the fourth quarter of 2019. By comparison, 38 hedge funds held shares or bullish call options in ADS a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Alliance Data Systems Corporation (NYSE:ADS) was held by Point72 Asset Management, which reported holding $46.7 million worth of stock at the end of September. It was followed by Lyrical Asset Management with a $45.9 million position. Other investors bullish on the company included Citadel Investment Group, Arlington Value Capital, and D E Shaw. In terms of the portfolio weights assigned to each position Pacifica Capital Investments allocated the biggest weight to Alliance Data Systems Corporation (NYSE:ADS), around 3.76% of its 13F portfolio. Arlington Value Capital is also relatively very bullish on the stock, setting aside 3.45 percent of its 13F equity portfolio to ADS.

Since Alliance Data Systems Corporation (NYSE:ADS) has faced falling interest from the aggregate hedge fund industry, it’s easy to see that there was a specific group of fund managers that elected to cut their positions entirely last quarter. It’s worth mentioning that Ahmet Okumus’s Okumus Fund Management said goodbye to the biggest investment of the “upper crust” of funds monitored by Insider Monkey, worth an estimated $153 million in stock. Ravi Chopra’s fund, Azora Capital, also dumped its stock, about $62.9 million worth. These moves are important to note, as total hedge fund interest fell by 15 funds last quarter.

Let’s go over hedge fund activity in other stocks similar to Alliance Data Systems Corporation (NYSE:ADS). We will take a look at Plexus Corp. (NASDAQ:PLXS), Turning Point Therapeutics, Inc. (NASDAQ:TPTX), PriceSmart, Inc. (NASDAQ:PSMT), and Ping Identity Holding Corp. (NYSE:PING). All of these stocks’ market caps are similar to ADS’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.25 hedge funds with bullish positions and the average amount invested in these stocks was $128 million. That figure was $246 million in ADS’s case. Turning Point Therapeutics, Inc. (NASDAQ:TPTX) is the most popular stock in this table. On the other hand PriceSmart, Inc. (NASDAQ:PSMT) is the least popular one with only 11 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 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 8.3% in 2020 through the end of May but still managed to beat the market by 13.2 percentage points. Hedge funds were also right about betting on ADS as the stock returned 38.4% so far in Q2 (through the end of May) 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.