Is Engaged Capital’s Request For AeroVironment, Inc. (AVAV) Board Declassification a Bullish Sign for Investors?

In the letter disclosed on Monday, Engaged Capital suggested that the board declassification should start at the next annual shareholder meeting, but there is a requirement for a vote of two-thirds of the common stock to support the proposal. In this way, the only possibility for the decision to be approved is for insiders to support it. On the other hand, the directors and officers of AeroVironment, Inc. (NASDAQ:AVAV), can defeat the declassification process that is supported by the independent shareholders, who are “the true owners of the company,” Engaged added.

Why is Engaged Capital’s statement regarding AeroVironment, Inc. (NASDAQ:AVAV) important? First of all, the involvement of activist investors can often increase the shareholder value of a company. However, what’s also important is that tracking the moves of investors can give us an idea about the hedge fund sentiment, which is often overlooked, because hedge funds’ have underperformed the market since the last financial crisis. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research has shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return more than 145% over the last 34 months and outperformed the S&P 500 Index by 85 percentage points (see the details here).

The outflow of capital during the first quarter shows that hedge funds have turned bearish on AeroVironment, Inc. (NASDAQ:AVAV), as the stock lost around 4% year-to-date and underperformed the Aerospace & Defense industry by almost 10 percentage points. Moreover, among small-cap companies, AeroVironment is the only loser in terms of year-to-date returns. However, if Engaged Capital manages to push further with its intentions to declassify the board, there is a high chance that shareholders will view it as a positive sign and the company will attract more attention from institutional investors in the future.

Disclosure: none