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. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. We at Insider Monkey have gone over 835 13F filings that hedge funds and prominent investors are required to file by the SEC The 13F filings show the funds’ and investors’ portfolio positions as of December 31st. In this article, we look at what those funds think of AvalonBay Communities Inc (NYSE:AVB) based on that data.
AvalonBay Communities Inc (NYSE:AVB) has seen an increase in enthusiasm from smart money in recent months. Our calculations also showed that AVB isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video below for Q3 rankings).
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 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 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Ken Heebner of Capital Growth Management
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. With all of this in mind we’re going to review the key hedge fund action surrounding AvalonBay Communities Inc (NYSE:AVB).
Hedge fund activity in AvalonBay Communities Inc (NYSE:AVB)
Heading into the first quarter of 2020, a total of 23 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 10% from the previous quarter. By comparison, 27 hedge funds held shares or bullish call options in AVB a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Citadel Investment Group, managed by Ken Griffin, holds the biggest position in AvalonBay Communities Inc (NYSE:AVB). Citadel Investment Group has a $137 million position in the stock, comprising 0.1% of its 13F portfolio. Sitting at the No. 2 spot is AQR Capital Management, led by Cliff Asness, holding a $100.8 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Other hedge funds and institutional investors that hold long positions comprise Greg Poole’s Echo Street Capital Management, Phill Gross and Robert Atchinson’s Adage Capital Management and D. E. Shaw’s D E Shaw. In terms of the portfolio weights assigned to each position Hill Winds Capital allocated the biggest weight to AvalonBay Communities Inc (NYSE:AVB), around 5.8% of its 13F portfolio. Echo Street Capital Management is also relatively very bullish on the stock, setting aside 0.97 percent of its 13F equity portfolio to AVB.
As aggregate interest increased, specific money managers have been driving this bullishness. OZ Management, managed by Daniel S. Och, created the biggest position in AvalonBay Communities Inc (NYSE:AVB). OZ Management had $4.6 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace’s Marshall Wace LLP also initiated a $3.7 million position during the quarter. The following funds were also among the new AVB investors: Michael Gelband’s ExodusPoint Capital, Ken Heebner’s Capital Growth Management, and Parvinder Thiara’s Athanor Capital.
Let’s now take a look at hedge fund activity in other stocks similar to AvalonBay Communities Inc (NYSE:AVB). We will take a look at Canon Inc. (NYSE:CAJ), WEC Energy Group, Inc. (NYSE:WEC), Telefonaktiebolaget LM Ericsson (publ) (NASDAQ:ERIC), and State Street Corporation (NYSE:STT). This group of stocks’ market values are similar to AVB’s market value.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| CAJ | 8 | 69992 | 0 |
| WEC | 15 | 211776 | -7 |
| ERIC | 18 | 367933 | -2 |
| STT | 45 | 1286711 | 8 |
| Average | 21.5 | 484103 | -0.25 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.5 hedge funds with bullish positions and the average amount invested in these stocks was $484 million. That figure was $442 million in AVB’s case. State Street Corporation (NYSE:STT) is the most popular stock in this table. On the other hand Canon Inc. (NYSE:CAJ) is the least popular one with only 8 bullish hedge fund positions. AvalonBay Communities Inc (NYSE:AVB) 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 11.7% in 2020 through March 11th but still beat the market by 3.1 percentage points. Hedge funds were also right about betting on AVB as the stock returned -6.6% during the first quarter (through March 11th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
Disclosure: None. This article was originally published at Insider Monkey.
