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Did Hedge Funds Drop The Ball On Ally Financial Inc (ALLY) ?

Asma UL Husna

Is Ally Financial Inc (NYSE:ALLY) a good investment right now? We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

Is Ally Financial Inc (NYSE:ALLY) the right pick for your portfolio? The best stock pickers are turning less bullish. The number of bullish hedge fund bets shrunk by 1 lately. Our calculations also showed that ALLY isn't among the 30 most popular stocks among hedge funds. ALLY was in 35 hedge funds' portfolios at the end of the first quarter of 2019. There were 36 hedge funds in our database with ALLY holdings at the end of the previous quarter.

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 market by 40 percentage points since May 2014 through May 30, 2019 (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.

Howard Marks OAKTREE CAPITAL MANAGEMENT

Let's take a peek at the recent hedge fund action encompassing Ally Financial Inc (NYSE:ALLY).

How are hedge funds trading Ally Financial Inc (NYSE:ALLY)?

Heading into the second 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 fourth quarter of 2018. Below, you can check out the change in hedge fund sentiment towards ALLY over the last 15 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

ALLY_june2019

More specifically, Oaktree Capital Management was the largest shareholder of Ally Financial Inc (NYSE:ALLY), with a stake worth $306.3 million reported as of the end of March. Trailing Oaktree Capital Management was Lakewood Capital Management, which amassed a stake valued at $298.7 million. First Pacific Advisors LLC, Magnolia Capital Fund, and Cyrus Capital Partners were also very fond of the stock, giving the stock large weights in their portfolios.

Since Ally Financial Inc (NYSE:ALLY) has faced a decline in interest from the aggregate hedge fund industry, it's easy to see that there is a sect of hedge funds who were dropping their full holdings last quarter. Interestingly, Joshua Friedman and Mitchell Julis's Canyon Capital Advisors dropped the biggest investment of all the hedgies followed by Insider Monkey, totaling about $108.8 million in stock, and Jeffrey Tannenbaum's Fir Tree was right behind this move, as the fund said goodbye to about $9 million worth. These transactions are interesting, as aggregate hedge fund interest was cut by 1 funds last quarter.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Ally Financial Inc (NYSE:ALLY) but similarly valued. These stocks are J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT), Duke Realty Corporation (NYSE:DRE), Lamb Weston Holdings, Inc. (NYSE:LW), and Tableau Software Inc (NYSE:DATA). This group of stocks' market values are closest to ALLY's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position JBHT,27,334824,2 DRE,16,302599,-6 LW,41,1255203,9 DATA,44,2281877,8 Average,32,1043626,3.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 32 hedge funds with bullish positions and the average amount invested in these stocks was $1044 million. That figure was $2048 million in ALLY's case. Tableau Software Inc (NYSE:DATA) is the most popular stock in this table. On the other hand Duke Realty Corporation (NYSE:DRE) is the least popular one with only 16 bullish hedge fund positions. Ally Financial Inc (NYSE:ALLY) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on ALLY as the stock returned 6.8% during the same period and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.

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

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