Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in Alliance Data Systems Corporation (NYSE:ADS)? The smart money sentiment can provide an answer to this question.
Alliance Data Systems Corporation (NYSE:ADS) has experienced a decrease in hedge fund interest recently. Alliance Data Systems Corporation (NYSE:ADS) was in 34 hedge funds’ portfolios at the end of the second quarter of 2021. The all time high for this statistic is 45. There were 36 hedge funds in our database with ADS positions at the end of the first quarter. Our calculations also showed that ADS isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings).
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 79 percentage points since March 2017 (see the details here). That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Matthew Hulsizer of PEAK6 Capital
At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, we like undervalued, EBITDA-positive growth stocks, so we are checking out stock pitches like this emerging biotech stock. We go through lists like the 10 best EV 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. Now let’s take a glance at the latest hedge fund action surrounding Alliance Data Systems Corporation (NYSE:ADS).
Do Hedge Funds Think ADS Is A Good Stock To Buy Now?
At the end of the second quarter, a total of 34 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -6% from the previous quarter. By comparison, 29 hedge funds held shares or bullish call options in ADS a year ago. With hedgies’ capital changing hands, there exists a select group of notable hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).
Among these funds, Palestra Capital Management held the most valuable stake in Alliance Data Systems Corporation (NYSE:ADS), which was worth $350.9 million at the end of the second quarter. On the second spot was Redwood Capital Management which amassed $188.2 million worth of shares. Lyrical Asset Management, Southpoint Capital Advisors, and Arctis Global were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Arctis Global allocated the biggest weight to Alliance Data Systems Corporation (NYSE:ADS), around 22.76% of its 13F portfolio. Arctis Global is also relatively very bullish on the stock, earmarking 13.83 percent of its 13F equity portfolio to ADS.
Because Alliance Data Systems Corporation (NYSE:ADS) has witnessed falling interest from hedge fund managers, it’s easy to see that there was a specific group of money managers who were dropping their entire stakes by the end of the second quarter. At the top of the heap, Josh Resnick’s Jericho Capital Asset Management dropped the largest stake of the “upper crust” of funds watched by Insider Monkey, totaling about $92.6 million in stock, and Frank Fu’s CaaS Capital was right behind this move, as the fund dropped about $1.4 million worth. These moves are important to note, as aggregate hedge fund interest fell by 2 funds by the end of the second quarter.
Let’s now take a look at 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 Cyberark Software Ltd (NASDAQ:CYBR), Driven Brands Holdings Inc. (NASDAQ:DRVN), ZIM Integrated Shipping Services Ltd. (NYSE:ZIM), ChampionX Corporation (NYSE:CHX), WESCO International, Inc. (NYSE:WCC), ASGN Incorporated (NYSE:ASGN), and Armstrong World Industries, Inc. (NYSE:AWI). All of these stocks’ market caps are similar to ADS’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CYBR | 27 | 502082 | -5 |
| DRVN | 19 | 91484 | 1 |
| ZIM | 25 | 327039 | 11 |
| CHX | 30 | 525472 | 2 |
| WCC | 23 | 1196955 | -5 |
| ASGN | 15 | 59880 | -5 |
| AWI | 17 | 595141 | -8 |
| Average | 22.3 | 471150 | -1.3 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 22.3 hedge funds with bullish positions and the average amount invested in these stocks was $471 million. That figure was $1339 million in ADS’s case. ChampionX Corporation (NYSE:CHX) is the most popular stock in this table. On the other hand ASGN Incorporated (NYSE:ASGN) is the least popular one with only 15 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 75.7. 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 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 21.8% in 2021 through October 11th and still beat the market by 4.4 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 -5.7% since the end of the second quarter (through 10/11) 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 most of these stocks already outperformed the market since 2019.
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Disclosure: None. This article was originally published at Insider Monkey.
