Were Hedge Funds Right About Loading Up On Avaya Holdings Corp. (AVYA?

We know that hedge funds generate strong, risk-adjusted returns over the long run, therefore imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, smart money investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do (like Peltz’s recent General Electric losses). However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, as the current round of 13F filings has just ended, let’s examine the smart money sentiment towards Avaya Holdings Corp. (NYSE:AVYA).

Is Avaya Holdings Corp. (NYSE:AVYA) going to take off soon? The smart money was becoming hopeful. The number of long hedge fund bets inched up by 7 lately. Avaya Holdings Corp. (NYSE:AVYA) was in 34 hedge funds’ portfolios at the end of June. The all time high for this statistics is 42. Our calculations also showed that AVYA isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 56 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

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. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. We go through lists like the 10 best high dividend stocks to buy to identify high dividend stocks with upside potential in this low interest rate environment. 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 website to get excerpts of these letters in your inbox. With all of this in mind let’s analyze the fresh hedge fund action regarding Avaya Holdings Corp. (NYSE:AVYA).

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

At Q2’s end, a total of 34 of the hedge funds tracked by Insider Monkey were long this stock, a change of 26% from the first quarter of 2020. By comparison, 42 hedge funds held shares or bullish call options in AVYA a year ago. With the smart money’s sentiment swirling, there exists a select group of key hedge fund managers who were upping their holdings significantly (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Melqart Asset Management, managed by Michel Massoud, holds the largest position in Avaya Holdings Corp. (NYSE:AVYA). Melqart Asset Management has a $42.3 million position in the stock, comprising 5.2% of its 13F portfolio. On Melqart Asset Management’s heels is Point72 Asset Management, led by Steve Cohen, holding a $30.8 million position; the fund has 0.2% of its 13F portfolio invested in the stock. Other members of the smart money that are bullish consist of James Dondero’s Highland Capital 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 20.55% of its 13F portfolio. Highland Capital Management is also relatively very bullish on the stock, designating 6.06 percent of its 13F equity portfolio to AVYA.

Consequently, some big names have been driving this bullishness. Rubric Capital Management, managed by David Rosen, established the largest position in Avaya Holdings Corp. (NYSE:AVYA). Rubric Capital Management had $17.3 million invested in the company at the end of the quarter. Doug Gordon, Jon Hilsabeck and Don Jabro’s Shellback Capital also initiated a $7.1 million position during the quarter. The other funds with new positions in the stock are Ben Levine, Andrew Manuel and Stefan Renold’s LMR Partners, Greg Eisner’s Engineers Gate Manager, and Paul Hondros’s AlphaOne Capital Partners.

Let’s now take a look at hedge fund activity in other stocks similar to Avaya Holdings Corp. (NYSE:AVYA). We will take a look at Arbor Realty Trust, Inc. (NYSE:ABR), Waddell & Reed Financial, Inc. (NYSE:WDR), Kontoor Brands, Inc. (NYSE:KTB), Huron Consulting Group Inc. (NASDAQ:HURN), EnPro Industries, Inc. (NYSE:NPO), CSW Industrials, Inc. (NASDAQ:CSWI), and First Busey Corporation (NASDAQ:BUSE). This group of stocks’ market values match AVYA’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
ABR 6 32144 -8
WDR 25 118264 3
KTB 18 64195 2
HURN 11 36397 -6
NPO 17 131944 3
CSWI 19 29123 3
BUSE 13 36069 2
Average 15.6 64019 -0.1

View table here if you experience formatting issues.

As you can see these stocks had an average of 15.6 hedge funds with bullish positions and the average amount invested in these stocks was $64 million. That figure was $263 million in AVYA’s case. Waddell & Reed Financial, Inc. (NYSE:WDR) is the most popular stock in this table. On the other hand Arbor Realty Trust, Inc. (NYSE:ABR) is the least popular one with only 6 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 84.3. 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 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 23% in 2020 through October 30th but still managed to beat the market by 20.1 percentage points. Hedge funds were also right about betting on AVYA as the stock returned 39.2% since the end of June (through 10/30) 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.