Here is What Hedge Funds Think About Alliance Data Systems Corporation (ADS)

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 866 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st. In this article we look at what those investors think of Alliance Data Systems Corporation (NYSE:ADS).

Alliance Data Systems Corporation (NYSE:ADS) investors should pay attention to an increase in support from the world’s most elite money managers of late. Alliance Data Systems Corporation (NYSE:ADS) was in 36 hedge funds’ portfolios at the end of the first quarter of 2021. The all time high for this statistic is 45. Our calculations also showed that ADS isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings).

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 115 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.

Mark Kingdon of Kingdon Capital

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. With all of this in mind let’s check out the latest hedge fund action encompassing Alliance Data Systems Corporation (NYSE:ADS).

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

At Q1’s end, a total of 36 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 13% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in ADS over the last 23 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Of the funds tracked by Insider Monkey, Lyrical Asset Management, managed by Andrew Wellington and Jeff Keswin, holds the largest position in Alliance Data Systems Corporation (NYSE:ADS). Lyrical Asset Management has a $213.1 million position in the stock, comprising 2.5% of its 13F portfolio. The second most bullish fund manager is Redwood Capital Management, managed by Jonathan Kolatch, which holds a $202.5 million position; 9.9% of its 13F portfolio is allocated to the stock. Some other peers with similar optimism contain Andrew Immerman and Jeremy Schiffman’s Palestra Capital Management, John Smith Clark’s Southpoint Capital Advisors and Viraj Mehta’s Arctis Global. In terms of the portfolio weights assigned to each position Arctis Global allocated the biggest weight to Alliance Data Systems Corporation (NYSE:ADS), around 19.78% of its 13F portfolio. Redwood Capital Management is also relatively very bullish on the stock, dishing out 9.86 percent of its 13F equity portfolio to ADS.

As industrywide interest jumped, some big names were breaking ground themselves. Palestra Capital Management, managed by Andrew Immerman and Jeremy Schiffman, created the biggest position in Alliance Data Systems Corporation (NYSE:ADS). Palestra Capital Management had $193.2 million invested in the company at the end of the quarter. Josh Resnick’s Jericho Capital Asset Management also made a $92.6 million investment in the stock during the quarter. The other funds with brand new ADS positions are Mark Kingdon’s Kingdon Capital, James Crichton’s Hitchwood Capital Management, and Gregg Moskowitz’s Interval Partners.

Let’s check out 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 Alteryx, Inc. (NYSE:AYX), Iridium Communications Inc. (NASDAQ:IRDM), Tenet Healthcare Corp (NYSE:THC), Evercore Inc. (NYSE:EVR), Nextera Energy Partners LP (NYSE:NEP), Tandem Diabetes Care Inc (NASDAQ:TNDM), and Douglas Emmett, Inc. (NYSE:DEI). All of these stocks’ market caps are similar to ADS’s market cap.

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As you can see these stocks had an average of 26.1 hedge funds with bullish positions and the average amount invested in these stocks was $565 million. That figure was $1421 million in ADS’s case. Tenet Healthcare Corp (NYSE:THC) is the most popular stock in this table. On the other hand Douglas Emmett, Inc. (NYSE:DEI) is the least popular one with only 14 bullish hedge fund positions. Alliance Data Systems Corporation (NYSE:ADS) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for ADS is 77. 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. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 19.3% in 2021 through June 25th and beat the market again by 4.8 percentage points. Unfortunately ADS wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on ADS were disappointed as the stock returned -2.7% since the end of March (through 6/25) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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