Viavi Solutions Inc (VIAV): Hedge Funds In Wait-and-See Mode

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Viavi Solutions Inc (NASDAQ:VIAV) and determine whether hedge funds had an edge regarding this stock.

Hedge fund interest in Viavi Solutions Inc (NASDAQ:VIAV) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that VIAV isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). At the end of this article we will also compare VIAV to other stocks including American States Water Co (NYSE:AWR), Saia Inc (NASDAQ:SAIA), and Altair Engineering Inc. (NASDAQ:ALTR) to get a better sense of its popularity.

Video: Watch our video about the top 5 most popular hedge fund stocks.

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 S&P 500 ETFs by 58 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.

Dmitry Balyasny of Balyasny Asset Management

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. Now let’s take a look at the new hedge fund action encompassing Viavi Solutions Inc (NASDAQ:VIAV).

How have hedgies been trading Viavi Solutions Inc (NASDAQ:VIAV)?

At the end of the second quarter, a total of 31 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from one quarter earlier. By comparison, 22 hedge funds held shares or bullish call options in VIAV a year ago. So, let’s see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to Insider Monkey’s hedge fund database, Renaissance Technologies has the largest position in Viavi Solutions Inc (NASDAQ:VIAV), worth close to $60.9 million, corresponding to 0.1% of its total 13F portfolio. The second most bullish fund manager is Citadel Investment Group, managed by Ken Griffin, which holds a $54.8 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Other peers that hold long positions consist of Phill Gross and Robert Atchinson’s Adage Capital Management, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital and Dmitry Balyasny’s Balyasny Asset Management. In terms of the portfolio weights assigned to each position KCL Capital allocated the biggest weight to Viavi Solutions Inc (NASDAQ:VIAV), around 2.5% of its 13F portfolio. Boardman Bay Capital Management is also relatively very bullish on the stock, dishing out 1.96 percent of its 13F equity portfolio to VIAV.

Seeing as Viavi Solutions Inc (NASDAQ:VIAV) has witnessed a decline in interest from hedge fund managers, it’s safe to say that there lies a certain “tier” of funds that slashed their positions entirely heading into Q3. It’s worth mentioning that Principal Global Investors’s Columbus Circle Investors sold off the biggest stake of all the hedgies followed by Insider Monkey, worth an estimated $23.8 million in stock. Stephen Perkins’s fund, Toronado Partners, also dumped its stock, about $22.7 million worth. These moves are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s also examine hedge fund activity in other stocks similar to Viavi Solutions Inc (NASDAQ:VIAV). We will take a look at American States Water Co (NYSE:AWR), Saia Inc (NASDAQ:SAIA), Altair Engineering Inc. (NASDAQ:ALTR), LCI Industries (NYSE:LCII), Louisiana-Pacific Corporation (NYSE:LPX), HMS Holdings Corp. (NASDAQ:HMSY), and Meritage Homes Corp (NYSE:MTH). This group of stocks’ market valuations are closest to VIAV’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.6 hedge funds with bullish positions and the average amount invested in these stocks was $205 million. That figure was $341 million in VIAV’s case. Louisiana-Pacific Corporation (NYSE:LPX) is the most popular stock in this table. On the other hand Altair Engineering Inc. (NASDAQ:ALTR) is the least popular one with only 14 bullish hedge fund positions. Viavi Solutions Inc (NASDAQ:VIAV) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for VIAV is 65.6. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 23.8% in 2020 through September 14th and beat the market by 17.6 percentage points. Unfortunately VIAV wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on VIAV were disappointed as the stock returned -7.3% 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 10 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.