Is Avaya Holdings Corp. (AVYA) A Good Stock To Buy?

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Avaya Holdings Corp. (NYSE:AVYA).

Is AVYA a good stock to buy? Avaya Holdings Corp. (NYSE:AVYA) has seen an increase in hedge fund sentiment in recent months. Avaya Holdings Corp. (NYSE:AVYA) was in 37 hedge funds’ portfolios at the end of the first quarter of 2021. The all time high for this statistic is 42. Our calculations also showed that AVYA isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings).

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 115 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.

Richard Driehaus of Driehaus Capital

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. With all of this in mind we’re going to view the fresh hedge fund action regarding Avaya Holdings Corp. (NYSE:AVYA).

Do Hedge Funds Think AVYA Is A Good Stock To Buy Now?

At the end of the first quarter, a total of 37 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 6% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in AVYA over the last 23 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Avaya Holdings Corp. (NYSE:AVYA) was held by Alkeon Capital Management, which reported holding $109 million worth of stock at the end of December. It was followed by Driehaus Capital with a $49 million position. Other investors bullish on the company included Arrowstreet Capital, Two Sigma Advisors, and Alta Fundamental Advisers. In terms of the portfolio weights assigned to each position Alta Fundamental Advisers allocated the biggest weight to Avaya Holdings Corp. (NYSE:AVYA), around 20.04% of its 13F portfolio. Highland Capital Management is also relatively very bullish on the stock, earmarking 9.82 percent of its 13F equity portfolio to AVYA.

As one would reasonably expect, some big names have jumped into Avaya Holdings Corp. (NYSE:AVYA) headfirst. Alkeon Capital Management, managed by Panayotis Takis Sparaggis, initiated the biggest position in Avaya Holdings Corp. (NYSE:AVYA). Alkeon Capital Management had $109 million invested in the company at the end of the quarter. Orin Hirschman’s AIGH Investment Partners also made a $8.4 million investment in the stock during the quarter. The other funds with new positions in the stock are Raymond J. Harbert’s Harbert Management, Phil Frohlich’s Prescott Group Capital Management, and Lee Ainslie’s Maverick Capital.

Let’s now take a look at 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 Himax Technologies, Inc. (NASDAQ:HIMX), Helios Technologies, Inc. (NASDAQ:HLIO), Niu Technologies (NASDAQ:NIU), First Financial Bancorp (NASDAQ:FFBC), Washington Federal Inc. (NASDAQ:WAFD), Organogenesis Holdings Inc. (NASDAQ:ORGO), and Rubius Therapeutics, Inc. (NASDAQ:RUBY). 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
HIMX 18 231988 6
HLIO 7 69637 1
NIU 14 192653 3
FFBC 11 25788 -3
WAFD 18 123411 4
ORGO 12 119015 2
RUBY 11 29025 2
Average 13 113074 2.1

View table here if you experience formatting issues.

As you can see these stocks had an average of 13 hedge funds with bullish positions and the average amount invested in these stocks was $113 million. That figure was $426 million in AVYA’s case. Himax Technologies, Inc. (NASDAQ:HIMX) is the most popular stock in this table. On the other hand Helios Technologies, Inc. (NASDAQ:HLIO) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks Avaya Holdings Corp. (NYSE:AVYA) is more popular among hedge funds. Our overall hedge fund sentiment score for AVYA is 83.4. 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. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 19.3% in 2021 through June 25th and still beat the market by 4.8 percentage points. Unfortunately AVYA wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on AVYA were disappointed as the stock returned -4.7% since the end of the first quarter (through 6/25) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as most of these stocks already outperformed the market since 2019.

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