Was The Smart Money Right About Avaya Holdings Corp. (AVYA)?

Hedge funds don’t get the respect they used to get. Nowadays investors prefer passive funds over actively managed funds. One thing they don’t realize is that 100% of the passive funds didn’t see the coronavirus recession coming, but a lot of hedge funds did. Even we published an article near the end of February and predicted a US recession. Think about all the losses you could have avoided if you sold your shares in February and bought them back at the end of March. In this article we are going to take a closer look at hedge fund sentiment towards Avaya Holdings Corp. (NYSE:AVYA).

Avaya Holdings Corp. (NYSE:AVYA) investors should be aware of a decrease in hedge fund sentiment in recent months. Our calculations also showed that AVYA isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

In the eyes of most market participants, hedge funds are assumed to be unimportant, outdated investment tools of years past. While there are over 8000 funds trading at the moment, Our researchers look at the bigwigs of this group, around 850 funds. It is estimated that this group of investors shepherd bulk of all hedge funds’ total capital, and by tracking their highest performing stock picks, Insider Monkey has revealed numerous investment strategies that have historically beaten the broader indices. Insider Monkey’s flagship short hedge fund strategy exceeded the S&P 500 short ETFs by around 20 percentage points per annum since its inception in March 2017. Our portfolio of short stocks lost 35.3% since February 2017 (through March 3rd) even though the market was up more than 35% during the same period. We just shared a list of 7 short targets in our latest quarterly update .

James Dondero Highland Capital Management

James Dondero of Highland Capital Management

We leave no stone unturned when looking for the next great investment idea. For example, this investor can predict short term winners following earnings announcements with 77% accuracy, so we check out his stock picks. A former hedge fund manager is pitching the “next Amazon” in this video; again we are listening. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s analyze the recent hedge fund action encompassing Avaya Holdings Corp. (NYSE:AVYA).

How have hedgies been trading Avaya Holdings Corp. (NYSE:AVYA)?

At the end of the fourth quarter, a total of 39 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -7% from the previous quarter. On the other hand, there were a total of 36 hedge funds with a bullish position in AVYA a year ago. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Melqart Asset Management was the largest shareholder of Avaya Holdings Corp. (NYSE:AVYA), with a stake worth $41.2 million reported as of the end of September. Trailing Melqart Asset Management was Point72 Asset Management, which amassed a stake valued at $39.6 million. Rubric Capital Management, Highland Capital Management, 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 HPS Investment Partners allocated the biggest weight to Avaya Holdings Corp. (NYSE:AVYA), around 71.23% of its 13F portfolio. Alta Fundamental Advisers is also relatively very bullish on the stock, dishing out 16.94 percent of its 13F equity portfolio to AVYA.

Judging by the fact that Avaya Holdings Corp. (NYSE:AVYA) has experienced bearish sentiment from the entirety of the hedge funds we track, it’s easy to see that there were a few fund managers who were dropping their full holdings heading into Q4. It’s worth mentioning that Kevin Michael Ulrich and Anthony Davis’s Anchorage Advisors cut the largest position of the 750 funds followed by Insider Monkey, comprising about $20.1 million in stock, and Frank Brosens’s Taconic Capital was right behind this move, as the fund sold off about $19.8 million worth. These transactions are intriguing to say the least, as total hedge fund interest fell by 3 funds heading into Q4.

Let’s check out hedge fund activity in other stocks similar to Avaya Holdings Corp. (NYSE:AVYA). We will take a look at Bandwidth Inc. (NASDAQ:BAND), NIC Inc. (NASDAQ:EGOV), Veritex Holdings Inc (NASDAQ:VBTX), and Perficient, Inc. (NASDAQ:PRFT). This group of stocks’ market caps match AVYA’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BAND 18 135004 -2
EGOV 22 125850 1
VBTX 10 89499 0
PRFT 23 95456 8
Average 18.25 111452 1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.25 hedge funds with bullish positions and the average amount invested in these stocks was $111 million. That figure was $383 million in AVYA’s case. Perficient, Inc. (NASDAQ:PRFT) is the most popular stock in this table. On the other hand Veritex Holdings Inc (NASDAQ:VBTX) is the least popular one with only 10 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 gained 1.0% in 2020 through May 1st and still beat the market by 12.9 percentage points. Unfortunately AVYA wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on AVYA were disappointed as the stock returned -31.7% during the four months of 2020 (through May 1st) 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.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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