How do we determine whether Avanos Medical, Inc. (NYSE:AVNS) makes for a good investment at the moment? We analyze the sentiment of a select group of the very best investors in the world, who spend immense amounts of time and resources studying companies. They may not always be right (no one is), but data shows that their consensus long positions have historically outperformed the market when we adjust for known risk factors.
Avanos Medical, Inc. (NYSE:AVNS) was in 12 hedge funds' portfolios at the end of September. AVNS shareholders have witnessed an increase in hedge fund sentiment recently. There were 11 hedge funds in our database with AVNS positions at the end of the previous quarter. Our calculations also showed that AVNS 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.
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 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 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.
[caption id="attachment_338410" align="aligncenter" width="500"] Jeffrey Bronchick of Cove Street Capital[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. 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 also rely on the best performing hedge funds' buy/sell signals. Let's take a glance at the fresh hedge fund action encompassing Avanos Medical, Inc. (NYSE:AVNS).
Hedge fund activity in Avanos Medical, Inc. (NYSE:AVNS)
At the end of the third quarter, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of 9% from the second quarter of 2019. By comparison, 17 hedge funds held shares or bullish call options in AVNS a year ago. With the smart money's sentiment swirling, there exists a select group of key hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).
Among these funds, RGM Capital held the most valuable stake in Avanos Medical, Inc. (NYSE:AVNS), which was worth $45.4 million at the end of the third quarter. On the second spot was D E Shaw which amassed $9.7 million worth of shares. Select Equity Group, Citadel Investment Group, and Cove Street Capital 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 RGM Capital allocated the biggest weight to Avanos Medical, Inc. (NYSE:AVNS), around 3.02% of its 13F portfolio. Cove Street Capital is also relatively very bullish on the stock, dishing out 0.31 percent of its 13F equity portfolio to AVNS.
Now, some big names have been driving this bullishness. Cove Street Capital, managed by Jeffrey Bronchick, initiated the most outsized position in Avanos Medical, Inc. (NYSE:AVNS). Cove Street Capital had $2.2 million invested in the company at the end of the quarter. Matthew Hulsizer's PEAK6 Capital Management also initiated a $1.2 million position during the quarter. The other funds with brand new AVNS positions are Israel Englander's Millennium Management and Dmitry Balyasny's Balyasny Asset Management.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Avanos Medical, Inc. (NYSE:AVNS) but similarly valued. We will take a look at Yext, Inc. (NYSE:YEXT), Altra Industrial Motion Corp. (NASDAQ:AIMC), SSR Mining Inc. (NASDAQ:SSRM), and Sally Beauty Holdings, Inc. (NYSE:SBH). This group of stocks' market valuations match AVNS's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position YEXT,13,98841,-8 AIMC,14,218302,0 SSRM,15,166357,-1 SBH,22,167354,2 Average,16,162714,-1.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 16 hedge funds with bullish positions and the average amount invested in these stocks was $163 million. That figure was $69 million in AVNS's case. Sally Beauty Holdings, Inc. (NYSE:SBH) is the most popular stock in this table. On the other hand Yext, Inc. (NYSE:YEXT) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks Avanos Medical, Inc. (NYSE:AVNS) is even less popular than YEXT. Hedge funds dodged a bullet by taking a bearish stance towards AVNS. 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 AVNS wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); AVNS investors were disappointed as the stock returned -7.5% 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.