Did Hedge Funds Make The Right Call On AvalonBay Communities Inc (AVB) ?

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 AvalonBay Communities Inc (NYSE:AVB) and determine whether hedge funds had an edge regarding this stock.

AvalonBay Communities Inc (NYSE:AVB) was in 30 hedge funds’ portfolios at the end of the first quarter of 2020. AVB has experienced an increase in activity from the world’s largest hedge funds in recent months. There were 23 hedge funds in our database with AVB positions at the end of the previous quarter. Our calculations also showed that AVB isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

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

At the moment there are a multitude of metrics investors put to use to assess their holdings. A pair of the most under-the-radar metrics are hedge fund and insider trading signals. Our experts have shown that, historically, those who follow the best picks of the best fund managers can outclass the market by a very impressive amount (see the details here).

Charles Davidson - Wexford Capital

Charles Davidson of Wexford Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. Keeping this in mind we’re going to take a look at the recent hedge fund action surrounding AvalonBay Communities Inc (NYSE:AVB).

What have hedge funds been doing with AvalonBay Communities Inc (NYSE:AVB)?

At the end of the first quarter, a total of 30 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 30% from the fourth quarter of 2019. By comparison, 26 hedge funds held shares or bullish call options in AVB a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).

More specifically, AQR Capital Management was the largest shareholder of AvalonBay Communities Inc (NYSE:AVB), with a stake worth $74.1 million reported as of the end of September. Trailing AQR Capital Management was Echo Street Capital Management, which amassed a stake valued at $63.7 million. Balyasny Asset Management, Long Pond Capital, and Citadel Investment Group were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Hill Winds Capital allocated the biggest weight to AvalonBay Communities Inc (NYSE:AVB), around 5.75% of its 13F portfolio. Long Pond Capital is also relatively very bullish on the stock, dishing out 1.7 percent of its 13F equity portfolio to AVB.

As industrywide interest jumped, key hedge funds have jumped into AvalonBay Communities Inc (NYSE:AVB) headfirst. Balyasny Asset Management, managed by Dmitry Balyasny, established the most outsized position in AvalonBay Communities Inc (NYSE:AVB). Balyasny Asset Management had $35.7 million invested in the company at the end of the quarter. John Khoury’s Long Pond Capital also made a $33.2 million investment in the stock during the quarter. The other funds with brand new AVB positions are Ricky Sandler’s Eminence Capital, John Overdeck and David Siegel’s Two Sigma Advisors, and Charles Davidson and Joseph Jacobs’s Wexford Capital.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as AvalonBay Communities Inc (NYSE:AVB) but similarly valued. We will take a look at Prudential Financial Inc (NYSE:PRU), Sea Limited (NYSE:SE), IDEXX Laboratories, Inc. (NASDAQ:IDXX), and Yum! Brands, Inc. (NYSE:YUM). This group of stocks’ market caps match AVB’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PRU 28 367179 -8
SE 76 3132301 0
IDXX 31 517366 -6
YUM 41 558913 5
Average 44 1143940 -2.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 44 hedge funds with bullish positions and the average amount invested in these stocks was $1144 million. That figure was $377 million in AVB’s case. Sea Limited (NYSE:SE) is the most popular stock in this table. On the other hand Prudential Financial Inc (NYSE:PRU) is the least popular one with only 28 bullish hedge fund positions. AvalonBay Communities Inc (NYSE:AVB) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 12.3% in 2020 through June 30th and surpassed the market by 15.5 percentage points. Unfortunately AVB wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); AVB investors were disappointed as the stock returned 6.2% during the second 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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Disclosure: None. This article was originally published at Insider Monkey.