Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.6% in 2019 (through the end of November) and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.
Aviat Networks Inc (NASDAQ:AVNW) shares haven't seen a lot of action during the third quarter. Overall, hedge fund sentiment was unchanged. The stock was in 5 hedge funds' portfolios at the end of September. The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Synlogic, Inc. (NASDAQ:SYBX), Big Rock Partners Acquisition Corp. (NASDAQ:BRPA), and Otonomy Inc (NASDAQ:OTIC) to gather more data points. Our calculations also showed that AVNW isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
[caption id="attachment_193003" align="aligncenter" width="450"] Chuck Royce of Royce & Associates[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Discover is offering this insane cashback card, so we look into shorting the stock. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We even check out this option genius' weekly trade ideas. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock already gained 20 percent. With all of this in mind let's go over the new hedge fund action encompassing Aviat Networks Inc (NASDAQ:AVNW).
How have hedgies been trading Aviat Networks Inc (NASDAQ:AVNW)?
Heading into the fourth quarter of 2019, a total of 5 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. The graph below displays the number of hedge funds with bullish position in AVNW over the last 17 quarters. So, let's examine 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, Warren Lichtenstein's Steel Partners has the number one position in Aviat Networks Inc (NASDAQ:AVNW), worth close to $9.1 million, comprising 3.3% of its total 13F portfolio. The second most bullish fund manager is Renaissance Technologies which holds a $4 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Remaining hedge funds and institutional investors that are bullish consist of Chuck Royce's Royce & Associates, Frederick DiSanto's Ancora Advisors and Gavin Saitowitz and Cisco J. del Valle's Springbok Capital. In terms of the portfolio weights assigned to each position Steel Partners allocated the biggest weight to Aviat Networks Inc (NASDAQ:AVNW), around 3.29% of its 13F portfolio. Ancora Advisors is also relatively very bullish on the stock, earmarking 0.05 percent of its 13F equity portfolio to AVNW.
Earlier we told you that the aggregate hedge fund interest in the stock was unchanged and we view this as a negative development. Even though there weren't any hedge funds dumping their holdings during the third quarter, there weren't any hedge funds initiating brand new positions. This indicates that hedge funds, at the very best, perceive this stock as dead money and they haven't identified any viable catalysts that can attract investor attention.
Let's go over hedge fund activity in other stocks - not necessarily in the same industry as Aviat Networks Inc (NASDAQ:AVNW) but similarly valued. We will take a look at Synlogic, Inc. (NASDAQ:SYBX), Big Rock Partners Acquisition Corp. (NASDAQ:BRPA), Otonomy Inc (NASDAQ:OTIC), and Tuesday Morning Corporation (NASDAQ:TUES). This group of stocks' market caps are similar to AVNW's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SYBX,6,9225,0 BRPA,7,8819,2 OTIC,8,12372,-1 TUES,12,5356,3 Average,8.25,8943,1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 8.25 hedge funds with bullish positions and the average amount invested in these stocks was $9 million. That figure was $16 million in AVNW's case. Tuesday Morning Corporation (NASDAQ:TUES) is the most popular stock in this table. On the other hand Synlogic, Inc. (NASDAQ:SYBX) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Aviat Networks Inc (NASDAQ:AVNW) is even less popular than SYBX. Hedge funds dodged a bullet by taking a bearish stance towards AVNW. Our calculations showed that the top 20 most popular hedge fund stocks returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately AVNW wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); AVNW investors were disappointed as the stock returned 2.1% during the fourth quarter (through the end of November) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market so far in Q4.
Disclosure: None. This article was originally published at Insider Monkey.