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 Avaya Holdings Corp. (NYSE:AVYA)?
Is Avaya Holdings Corp. (NYSE:AVYA) an exceptional stock to buy now? Hedge funds are taking a bearish view. The number of long hedge fund bets went down by 2 in recent months. Our calculations also showed that AVYA 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). AVYA was in 40 hedge funds’ portfolios at the end of September. There were 42 hedge funds in our database with AVYA holdings at the end of the previous quarter.
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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
James Dondero of Highland Capital Management
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. 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. We even check out this option genius’ weekly trade ideas. 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 already gained 20 percent. Keeping this in mind we’re going to check out the key hedge fund action surrounding Avaya Holdings Corp. (NYSE:AVYA).
Hedge fund activity in Avaya Holdings Corp. (NYSE:AVYA)
At the end of the third quarter, a total of 40 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -5% from the second quarter of 2019. By comparison, 34 hedge funds held shares or bullish call options in AVYA 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, Michel Massoud’s Melqart Asset Management has the most valuable position in Avaya Holdings Corp. (NYSE:AVYA), worth close to $35.9 million, comprising 3.3% of its total 13F portfolio. The second largest stake is held by Highland Capital Management, managed by James Dondero, which holds a $35.7 million position; 2.2% of its 13F portfolio is allocated to the company. Remaining members of the smart money that hold long positions consist of Kevin Michael Ulrich and Anthony Davis’s Anchorage Advisors, Frank Brosens’s Taconic Capital and Scott Kapnick’s HPS Investment Partners. In terms of the portfolio weights assigned to each position HPS Investment Partners allocated the biggest weight to Avaya Holdings Corp. (NYSE:AVYA), around 42.31% of its 13F portfolio. DW Partners is also relatively very bullish on the stock, setting aside 16.44 percent of its 13F equity portfolio to AVYA.
Judging by the fact that Avaya Holdings Corp. (NYSE:AVYA) has experienced bearish sentiment from the smart money, it’s safe to say that there exists a select few fund managers that slashed their full holdings heading into Q4. It’s worth mentioning that Tom Wagner and Ara Cohen’s Knighthead Capital dumped the largest stake of the 750 funds followed by Insider Monkey, valued at about $15.9 million in call options, and David Rosen’s Rubric Capital Management was right behind this move, as the fund said goodbye to about $15.2 million worth. These moves are intriguing to say the least, as total hedge fund interest dropped by 2 funds heading into Q4.
Let’s check out hedge fund activity in other stocks similar to Avaya Holdings Corp. (NYSE:AVYA). These stocks are Lakeland Financial Corporation (NASDAQ:LKFN), Editas Medicine, Inc. (NASDAQ:EDIT), Hudson Ltd. (NYSE:HUD), and SRC Energy Inc. (NYSE:SRCI). This group of stocks’ market valuations are similar to AVYA’s market valuation.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| LKFN | 10 | 20174 | -1 |
| EDIT | 11 | 100575 | -3 |
| HUD | 12 | 31637 | 0 |
| SRCI | 20 | 245795 | 1 |
| Average | 13.25 | 99545 | -0.75 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 13.25 hedge funds with bullish positions and the average amount invested in these stocks was $100 million. That figure was $259 million in AVYA’s case. SRC Energy Inc. (NYSE:SRCI) is the most popular stock in this table. On the other hand Lakeland Financial Corporation (NASDAQ:LKFN) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks Avaya Holdings Corp. (NYSE:AVYA) 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 AVYA wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on AVYA were disappointed as the stock returned -12.6% 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.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
