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Hedge Funds Have Never Been This Bullish On Alliance Data Systems Corporation (ADS)

Debasis Saha

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let's take a look at whether Alliance Data Systems Corporation (NYSE:ADS) is a good investment right now. We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds' picks don't beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.

Alliance Data Systems Corporation (NYSE:ADS) has experienced an increase in activity from the world's largest hedge funds of late. Our calculations also showed that ADS isn't among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 41 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 35.3% through March 3rd. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Ahmet Okumus - Okumus Capital

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic's significance before most investors. Now let's check out the fresh hedge fund action regarding Alliance Data Systems Corporation (NYSE:ADS).

What have hedge funds been doing with Alliance Data Systems Corporation (NYSE:ADS)?

At Q4's end, a total of 45 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 15% from one quarter earlier. By comparison, 39 hedge funds held shares or bullish call options in ADS a year ago. With hedgies' capital changing hands, there exists a select group of key hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

Is ADS A Good Stock To Buy?

Among these funds, Lyrical Asset Management held the most valuable stake in Alliance Data Systems Corporation (NYSE:ADS), which was worth $177.4 million at the end of the third quarter. On the second spot was Point72 Asset Management which amassed $171.8 million worth of shares. Okumus Fund Management, Arlington Value Capital, and AQR Capital Management 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 Okumus Fund Management allocated the biggest weight to Alliance Data Systems Corporation (NYSE:ADS), around 36.44% of its 13F portfolio. Pacifica Capital Investments is also relatively very bullish on the stock, designating 9.94 percent of its 13F equity portfolio to ADS.

As industrywide interest jumped, some big names have jumped into Alliance Data Systems Corporation (NYSE:ADS) headfirst. Okumus Fund Management, managed by Ahmet Okumus, initiated the biggest position in Alliance Data Systems Corporation (NYSE:ADS). Okumus Fund Management had $153 million invested in the company at the end of the quarter. Anand Parekh's Alyeska Investment Group also made a $51.2 million investment in the stock during the quarter. The other funds with new positions in the stock are Renaissance Technologies, Robert Pohly's Samlyn Capital, and Dmitry Balyasny's Balyasny Asset Management.

Let's now review 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 Kemper Corporation (NYSE:KMPR), First Horizon National Corporation (NYSE:FHN), GSX Techedu Inc. (NYSE:GSX), and Calgon Carbon Corporation (NYSE:CCC). 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 KMPR,20,94921,-1 FHN,27,246677,-7 GSX,10,86015,7 CCC,45,813021,7 Average,25.5,310159,1.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 25.5 hedge funds with bullish positions and the average amount invested in these stocks was $310 million. That figure was $1320 million in ADS's case. Calgon Carbon Corporation (NYSE:CCC) is the most popular stock in this table. On the other hand GSX Techedu Inc. (NYSE:GSX) is the least popular one with only 10 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. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but beat the market by 5.5 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 -65.5% during the same time period and underperformed 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 many of these stocks already outperformed the market so far this year. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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