Alliance Data Systems Corporation (ADS) vs. Hedge Fund Favorites in 2019

Abigail Fisher

Sun, Dec 29, 2019, 9:59 AM

Hedge funds and other investment firms that we track manage billions of dollars of their wealthy clients' money, and needless to say, they are painstakingly thorough when analyzing where to invest this money, as their own wealth also depends on it. Regardless of the various methods used by elite investors like David Tepper and David Abrams, the resources they expend are second-to-none. This is especially valuable when it comes to small-cap stocks, which is where they generate their strongest outperformance, as their resources give them a huge edge when it comes to studying these stocks compared to the average investor, which is why we intently follow their activity in the small-cap space. Nevertheless, it is also possible to identify cheap large cap stocks by following the footsteps of best performing hedge funds. What do these smart investors think about Alliance Data Systems Corporation (NYSE:ADS)?

Is Alliance Data Systems Corporation (NYSE:ADS) an outstanding investment right now? Prominent investors are in an optimistic mood. The number of bullish hedge fund positions improved by 1 lately. Our calculations also showed that ADS 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).

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey's flagship best performing hedge funds strategy returned 91% since May 2014 and outperformed the Russell 2000 ETFs by nearly 40 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

[caption id="attachment_30493" align="aligncenter" width="498"]

Jeffrey Ubben of ValueAct Capital[/caption]

We leave no stone unturned when looking for the next great investment idea. For example 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. 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 is still extremely cheap despite already gaining 20 percent. With all of this in mind we're going to check out the fresh hedge fund action encompassing Alliance Data Systems Corporation (NYSE:ADS).

How are hedge funds trading Alliance Data Systems Corporation (NYSE:ADS)?

Heading into the fourth quarter of 2019, a total of 35 of the hedge funds tracked by Insider Monkey were long this stock, a change of 3% from the second quarter of 2019. The graph below displays the number of hedge funds with bullish position in ADS over the last 17 quarters. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, ValueAct Capital held the most valuable stake in Alliance Data Systems Corporation (NYSE:ADS), which was worth $475.1 million at the end of the third quarter. On the second spot was Lyrical Asset Management which amassed $192.8 million worth of shares. Arlington Value Capital, Citadel Investment Group, and Bridgewater Associates 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 Pacifica Capital Investments allocated the biggest weight to Alliance Data Systems Corporation (NYSE:ADS), around 10.32% of its 13F portfolio. Arlington Value Capital is also relatively very bullish on the stock, designating 9.03 percent of its 13F equity portfolio to ADS.

With a general bullishness amongst the heavyweights, key money managers were leading the bulls' herd. Raging Capital Management, managed by William C. Martin, assembled the biggest position in Alliance Data Systems Corporation (NYSE:ADS). Raging Capital Management had $12 million invested in the company at the end of the quarter. Ravi Chopra's Azora Capital also made a $10.7 million investment in the stock during the quarter. The other funds with brand new ADS positions are Ben Levine, Andrew Manuel and Stefan Renold's LMR Partners, Benjamin A. Smith's Laurion Capital Management, and Paul Tudor Jones's Tudor Investment Corp.

Let's now review hedge fund activity in other stocks similar to Alliance Data Systems Corporation (NYSE:ADS). These stocks are Robert Half International Inc. (NYSE:RHI), Steel Dynamics, Inc. (NASDAQ:STLD), PVH Corp (NYSE:PVH), and Signature Bank (NASDAQ:SBNY). This group of stocks' market valuations are closest to ADS's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position RHI,21,577040,-5 STLD,25,515633,-6 PVH,27,1027637,-5 SBNY,32,502279,3 Average,26.25,655647,-3.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.25 hedge funds with bullish positions and the average amount invested in these stocks was $656 million. That figure was $1242 million in ADS's case. Signature Bank (NASDAQ:SBNY) is the most popular stock in this table. On the other hand Robert Half International Inc. (NYSE:RHI) is the least popular one with only 21 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 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. Unfortunately ADS wasn't nearly as popular as these 20 stocks and hedge funds that were betting on ADS were disappointed as the stock returned -24.3% so far in 2019 (through 12/23) and trailed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 65 percent of these stocks already outperformed the market in 2019.