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Were Hedge Funds Right About Souring On AeroVironment, Inc. (AVAV)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional 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. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards AeroVironment, Inc. (NASDAQ:AVAV) and determine whether hedge funds skillfully traded this stock.

Is AeroVironment, Inc. (NASDAQ:AVAV) a marvelous investment today? Investors who are in the know were becoming less confident. The number of bullish hedge fund bets shrunk by 3 in recent months. Our calculations also showed that AVAV 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.

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 58 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.

FISHER ASSET MANAGEMENT

Ken Fisher of Fisher Asset 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. With all of this in mind let’s take a peek at the latest hedge fund action regarding AeroVironment, Inc. (NASDAQ:AVAV).

Hedge fund activity in AeroVironment, Inc. (NASDAQ:AVAV)

At Q1’s end, a total of 10 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -23% from the fourth quarter of 2019. Below, you can check out the change in hedge fund sentiment towards AVAV over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to Insider Monkey’s hedge fund database, Millennium Management, managed by Israel Englander, holds the number one position in AeroVironment, Inc. (NASDAQ:AVAV). Millennium Management has a $21.6 million position in the stock, comprising less than 0.1%% of its 13F portfolio. Coming in second is Ken Fisher of Fisher Asset Management, with a $15.5 million position; less than 0.1%% of its 13F portfolio is allocated to the company. Remaining professional money managers with similar optimism contain Ken Griffin’s Citadel Investment Group, Peter Muller’s PDT Partners and Chuck Royce’s Royce & Associates. In terms of the portfolio weights assigned to each position PDT Partners allocated the biggest weight to AeroVironment, Inc. (NASDAQ:AVAV), around 0.19% of its 13F portfolio. Millennium Management is also relatively very bullish on the stock, earmarking 0.05 percent of its 13F equity portfolio to AVAV.

Because AeroVironment, Inc. (NASDAQ:AVAV) has witnessed bearish sentiment from the aggregate hedge fund industry, it’s safe to say that there were a few funds who sold off their full holdings in the first quarter. It’s worth mentioning that Ken Grossman and Glen Schneider’s SG Capital Management sold off the largest position of the “upper crust” of funds watched by Insider Monkey, totaling about $10.3 million in stock. Renaissance Technologies, also said goodbye to its stock, about $5.4 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 3 funds in the first quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as AeroVironment, Inc. (NASDAQ:AVAV) but similarly valued. These stocks are Theravance Biopharma Inc (NASDAQ:TBPH), TransAlta Corporation (NYSE:TAC), Akcea Therapeutics, Inc. (NASDAQ:AKCA), and Tootsie Roll Industries, Inc. (NYSE:TR). This group of stocks’ market values are closest to AVAV’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TBPH 14 335681 1
TAC 15 55063 5
AKCA 11 11776 1
TR 14 68255 -3
Average 13.5 117694 1

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.5 hedge funds with bullish positions and the average amount invested in these stocks was $118 million. That figure was $51 million in AVAV’s case. TransAlta Corporation (NYSE:TAC) is the most popular stock in this table. On the other hand Akcea Therapeutics, Inc. (NASDAQ:AKCA) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks AeroVironment, Inc. (NASDAQ:AVAV) is even less popular than AKCA. Hedge funds clearly dropped the ball on AVAV as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. 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 still beat the market by 15.5 percentage points. A small number of hedge funds were also right about betting on AVAV as the stock returned 30.6% in the second quarter and outperformed the market by an even larger margin.

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