Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ complex research processes to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space. Nevertheless, it is also possible to find underpriced large-cap stocks by following the hedge funds' moves.
Avantor, Inc. (NYSE:AVTR) investors should pay attention to an increase in support from the world's most elite money managers in recent months. Our calculations also showed that AVTR isn't among the 30 most popular stocks among hedge funds (view the video below). Video: Click the image to 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 market by 40 percentage points since May 2014 through May 30, 2019 (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.
Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to take a gander at the key hedge fund action regarding Avantor, Inc. (NYSE:AVTR).
Hedge fund activity in Avantor, Inc. (NYSE:AVTR)
At Q2's end, a total of 30 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 30 from the previous quarter. Below, you can check out the change in hedge fund sentiment towards AVTR over the last 16 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
When looking at the institutional investors followed by Insider Monkey, Viking Global, managed by Andreas Halvorsen, holds the most valuable position in Avantor, Inc. (NYSE:AVTR). Viking Global has a $216.6 million position in the stock, comprising 1% of its 13F portfolio. The second largest stake is held by Senator Investment Group, led by Doug Silverman and Alexander Klabin, holding a $195.7 million position; 3.6% of its 13F portfolio is allocated to the stock. Some other members of the smart money with similar optimism contain Ken Griffin's Citadel Investment Group, John Armitage's Egerton Capital Limited and Jeffrey Talpins's Element Capital Management.
As industrywide interest jumped, key hedge funds were leading the bulls' herd. Viking Global, managed by Andreas Halvorsen, initiated the largest position in Avantor, Inc. (NYSE:AVTR). Viking Global had $216.6 million invested in the company at the end of the quarter. Doug Silverman and Alexander Klabin's Senator Investment Group also made a $195.7 million investment in the stock during the quarter. The other funds with brand new AVTR positions are Ken Griffin's Citadel Investment Group, John Armitage's Egerton Capital Limited, and Jeffrey Talpins's Element Capital Management.
Let's also examine hedge fund activity in other stocks similar to Avantor, Inc. (NYSE:AVTR). These stocks are Mylan N.V. (NASDAQ:MYL), Zendesk Inc (NYSE:ZEN), Torchmark Corporation (NYSE:TMK), and Zscaler, Inc. (NASDAQ:ZS). This group of stocks' market values match AVTR's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MYL,30,1601252,0 ZEN,50,1843391,-3 TMK,19,808569,-2 ZS,25,325854,6 Average,31,1144767,0.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 31 hedge funds with bullish positions and the average amount invested in these stocks was $1145 million. That figure was $1082 million in AVTR's case. Zendesk Inc (NYSE:ZEN) is the most popular stock in this table. On the other hand Torchmark Corporation (NYSE:TMK) is the least popular one with only 19 bullish hedge fund positions. Avantor, Inc. (NYSE:AVTR) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately AVTR wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); AVTR investors were disappointed as the stock returned -23% during the third quarter 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 many of these stocks already outperformed the market so far in 2019.
Disclosure: None. This article was originally published at Insider Monkey.