We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn't mean that they don't have occasional colossal losses; they do (like Peltz's recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Alliance Data Systems Corporation (NYSE:ADS).
Is Alliance Data Systems Corporation (NYSE:ADS) a healthy stock for your portfolio? Prominent investors are in a pessimistic mood. The number of bullish hedge fund bets decreased by 4 lately. Our calculations also showed that ADS isn't among the 30 most popular stocks among hedge funds (see the video below). ADS was in 34 hedge funds' portfolios at the end of June. There were 38 hedge funds in our database with ADS positions at the end of the previous quarter. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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 25.8% year to date (through May 30th) and outperformed the market even though it draws its stock picks among small-cap stocks. This strategy also outperformed the market by 40 percentage points since its inception (see the details here). That's why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.
Unlike this former hedge fund manager who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to go over the new hedge fund action surrounding Alliance Data Systems Corporation (NYSE:ADS).
What does smart money think about Alliance Data Systems Corporation (NYSE:ADS)?
Heading into the third quarter of 2019, a total of 34 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -11% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards ADS over the last 16 quarters. So, let's review 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 $519.6 million at the end of the second quarter. On the second spot was Arlington Value Capital which amassed $196 million worth of shares. Moreover, Citadel Investment Group, Point72 Asset Management, and Bridgewater Associates were also bullish on Alliance Data Systems Corporation (NYSE:ADS), allocating a large percentage of their portfolios to this stock.
Due to the fact that Alliance Data Systems Corporation (NYSE:ADS) has witnessed a decline in interest from the aggregate hedge fund industry, it's easy to see that there is a sect of hedgies that decided to sell off their entire stakes heading into Q3. Interestingly, Glenn Greenberg's Brave Warrior Capital said goodbye to the biggest position of the "upper crust" of funds followed by Insider Monkey, totaling an estimated $197.2 million in stock, and Edward Goodnow's Goodnow Investment Group was right behind this move, as the fund sold off about $21 million worth. These transactions are interesting, as aggregate hedge fund interest was cut by 4 funds heading into Q3.
Let's now review hedge fund activity in other stocks similar to Alliance Data Systems Corporation (NYSE:ADS). We will take a look at Telecom Argentina S.A. (NYSE:TEO), Neurocrine Biosciences, Inc. (NASDAQ:NBIX), Kohl's Corporation (NYSE:KSS), and Kilroy Realty Corp (NYSE:KRC). All of these stocks' market caps are closest to ADS's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TEO,3,54171,-6 NBIX,34,1237372,-1 KSS,29,550214,2 KRC,16,161727,5 Average,20.5,500871,0 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.5 hedge funds with bullish positions and the average amount invested in these stocks was $501 million. That figure was $1420 million in ADS's case. Neurocrine Biosciences, Inc. (NASDAQ:NBIX) is the most popular stock in this table. On the other hand Telecom Argentina S.A. (NYSE:TEO) is the least popular one with only 3 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 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 -8.1% during the third quarter 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.
Disclosure: None. This article was originally published at Insider Monkey.