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Is Zayo Group Holdings Inc (ZAYO) A Good Stock To Buy?

Nina Todic

Investing in small cap stocks has historically been a way to outperform the market, as small cap companies typically grow faster on average than the blue chips. That outperformance comes with a price, however, as there are occasional periods of higher volatility. The one and a half month time period since the end of the third quarter is one of those periods, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by about 4 percentage points. Given that the funds we track tend to have a disproportionate amount of their portfolios in smaller cap stocks, they have seen some volatility in their portfolios too. Actually their moves are potentially one of the factors that contributed to this volatility. In this article, we use our extensive database of hedge fund holdings to find out what the smart money thinks of Zayo Group Holdings Inc (NYSE:ZAYO).

Zayo Group Holdings Inc (NYSE:ZAYO) investors should be aware of an increase in activity from the world's largest hedge funds recently. ZAYO was in 55 hedge funds' portfolios at the end of the third quarter of 2018. There were 47 hedge funds in our database with ZAYO positions at the end of the previous quarter. Our calculations also showed that ZAYO isn't among the 30 most popular stocks among hedge funds.

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 market by 18 percentage points since May 2014 through December 3, 2018 (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 our short portfolio.

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We're going to review the new hedge fund action regarding Zayo Group Holdings Inc (NYSE:ZAYO).

Hedge fund activity in Zayo Group Holdings Inc (NYSE:ZAYO)

At Q3's end, a total of 55 of the hedge funds tracked by Insider Monkey were long this stock, a change of 17% from the second quarter of 2018. Below, you can check out the change in hedge fund sentiment towards ZAYO over the last 13 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.

No of Hedge Funds with ZAYO Positions

The largest stake in Zayo Group Holdings Inc (NYSE:ZAYO) was held by Senator Investment Group, which reported holding $331.4 million worth of stock at the end of September. It was followed by Zimmer Partners with a $279.2 million position. Other investors bullish on the company included Sachem Head Capital, Kensico Capital, and Citadel Investment Group.

Now, specific money managers have jumped into Zayo Group Holdings Inc (NYSE:ZAYO) headfirst. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, assembled the most outsized position in Zayo Group Holdings Inc (NYSE:ZAYO). Arrowstreet Capital had $70.9 million invested in the company at the end of the quarter. Scott Bessent's Key Square Capital Management also made a $34.8 million investment in the stock during the quarter. The other funds with new positions in the stock are Jim Simons's Renaissance Technologies, Mike Masters's Masters Capital Management, and Kenneth Tropin's Graham Capital Management.

Let's go over hedge fund activity in other stocks similar to Zayo Group Holdings Inc (NYSE:ZAYO). We will take a look at Formula One Group (NASDAQ:FWONA), Gol Linhas Aereas Inteligentes SA (NYSE:GOL), AerCap Holdings N.V. (NYSE:AER), and Unum Group (NYSE:UNM). This group of stocks' market caps match ZAYO's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position FWONA,21,310365,-2 GOL,4,51989,-2 AER,22,1113940,-2 UNM,25,399209,1 Average,18,468876,-1.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 18 hedge funds with bullish positions and the average amount invested in these stocks was $469 million. That figure was $2 billion in ZAYO's case. Unum Group (NYSE:UNM) is the most popular stock in this table. On the other hand Gol Linhas Aereas Inteligentes SA (NYSE:GOL) is the least popular one with only 4 bullish hedge fund positions. Compared to these stocks Zayo Group Holdings Inc (NYSE:ZAYO) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers, it may be a good idea to analyze it in detail and potentially include it in your portfolio.

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

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