Did Hedge Funds Make The Right Call On Avaya Holdings Corp. (AVYA) ?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards Avaya Holdings Corp. (NYSE:AVYA) at the end of the first quarter and determine whether the smart money was really smart about this stock.

Is Avaya Holdings Corp. (NYSE:AVYA) an excellent investment right now? Investors who are in the know were getting less bullish. The number of long hedge fund bets were cut by 12 in recent months. Our calculations also showed that AVYA 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.

In the eyes of most traders, hedge funds are assumed to be slow, old financial tools of yesteryear. While there are over 8000 funds with their doors open at present, Our researchers hone in on the crème de la crème of this club, around 850 funds. It is estimated that this group of investors command the majority of the hedge fund industry’s total asset base, and by keeping track of their unrivaled investments, Insider Monkey has identified a few investment strategies that have historically defeated Mr. Market. Insider Monkey’s flagship short hedge fund strategy outpaced the S&P 500 short ETFs by around 20 percentage points a year since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

James Dondero Highland Capital Management

James Dondero of Highland Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to analyze the key hedge fund action encompassing Avaya Holdings Corp. (NYSE:AVYA).

Hedge fund activity in Avaya Holdings Corp. (NYSE:AVYA)

At the end of the first quarter, a total of 27 of the hedge funds tracked by Insider Monkey were long this stock, a change of -31% from the previous quarter. By comparison, 40 hedge funds held shares or bullish call options in AVYA 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.

When looking at the institutional investors followed by Insider Monkey, Melqart Asset Management, managed by Michel Massoud, holds the largest position in Avaya Holdings Corp. (NYSE:AVYA). Melqart Asset Management has a $26.6 million position in the stock, comprising 2.6% of its 13F portfolio. Sitting at the No. 2 spot is James Dondero of Highland Capital Management, with a $18.8 million position; 3.6% of its 13F portfolio is allocated to the company. Some other peers that are bullish contain Steve Cohen’s Point72 Asset Management, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital and Steven Boyd’s Armistice Capital. In terms of the portfolio weights assigned to each position Alta Fundamental Advisers allocated the biggest weight to Avaya Holdings Corp. (NYSE:AVYA), around 15.65% of its 13F portfolio. Mariner Investment Group is also relatively very bullish on the stock, dishing out 6.8 percent of its 13F equity portfolio to AVYA.

Because Avaya Holdings Corp. (NYSE:AVYA) has experienced a decline in interest from hedge fund managers, logic holds that there was a specific group of fund managers who were dropping their full holdings in the first quarter. It’s worth mentioning that David Rosen’s Rubric Capital Management cut the biggest position of the 750 funds followed by Insider Monkey, totaling an estimated $37.7 million in stock. Scott Kapnick’s fund, HPS Investment Partners, also sold off its stock, about $22.3 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest dropped by 12 funds in the first quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Avaya Holdings Corp. (NYSE:AVYA) but similarly valued. We will take a look at Krystal Biotech, Inc. (NASDAQ:KRYS), Cerus Corporation (NASDAQ:CERS), Teekay Tankers Ltd. (NYSE:TNK), and Oyster Point Pharma, Inc. (NASDAQ:OYST). All of these stocks’ market caps resemble AVYA’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
KRYS 9 188739 0
CERS 17 105927 5
TNK 21 66975 2
OYST 4 1827 1
Average 12.75 90867 2

View table here if you experience formatting issues.

As you can see these stocks had an average of 12.75 hedge funds with bullish positions and the average amount invested in these stocks was $91 million. That figure was $142 million in AVYA’s case. Teekay Tankers Ltd. (NYSE:TNK) is the most popular stock in this table. On the other hand Oyster Point Pharma, Inc. (NASDAQ:OYST) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Avaya Holdings Corp. (NYSE:AVYA) is more popular among hedge funds. 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 returned 12.3% in 2020 through June 30th but still managed to beat the market by 15.5 percentage points. Hedge funds were also right about betting on AVYA as the stock returned 52.8% in Q2 and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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