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Were Hedge Funds Right About Loading Up On Avalara, Inc. (AVLR)?

Reymerlyn Martin
·6 min read

Many prominent investors, including Warren Buffett, David Tepper and Stan Druckenmiller, have been cautious regarding the current bull market and missed out as the stock market reached another high in recent weeks. On the other hand, technology hedge funds weren't timid and registered double digit market beating gains. Financials, energy and industrial stocks aren't doing great but many of the stocks that delivered strong returns since March are still going very strong and hedge funds actually increased their positions in these stocks. In this article we will find out how hedge fund sentiment to Avalara, Inc. (NYSE:AVLR) changed recently.

Is Avalara, Inc. (NYSE:AVLR) an exceptional investment now? The best stock pickers were in a bullish mood. The number of bullish hedge fund positions increased by 3 in recent months. Avalara, Inc. (NYSE:AVLR) was in 37 hedge funds' portfolios at the end of June. The all time high for this statistics is 48. Our calculations also showed that AVLR isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). There were 34 hedge funds in our database with AVLR positions at the end of the first quarter. 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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Alex Sacerdote of Whale Rock Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now we're going to take a peek at the new hedge fund action surrounding Avalara, Inc. (NYSE:AVLR).

What have hedge funds been doing with Avalara, Inc. (NYSE:AVLR)?

At the end of the second quarter, a total of 37 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 9% from the first quarter of 2020. By comparison, 40 hedge funds held shares or bullish call options in AVLR a year ago. With hedgies' capital changing hands, there exists a few key hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

Among these funds, Alkeon Capital Management held the most valuable stake in Avalara, Inc. (NYSE:AVLR), which was worth $344.5 million at the end of the third quarter. On the second spot was Whale Rock Capital Management which amassed $275.3 million worth of shares. Renaissance Technologies, Tensile Capital, and SQN Investors 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 Tensile Capital allocated the biggest weight to Avalara, Inc. (NYSE:AVLR), around 25.73% of its 13F portfolio. Broad Bay Capital is also relatively very bullish on the stock, designating 7.23 percent of its 13F equity portfolio to AVLR.

Consequently, key hedge funds were breaking ground themselves. Point72 Asset Management, managed by Steve Cohen, established the most valuable position in Avalara, Inc. (NYSE:AVLR). Point72 Asset Management had $10.1 million invested in the company at the end of the quarter. Seymour Sy Kaufman and Michael Stark's Crosslink Capital also initiated a $8.7 million position during the quarter. The following funds were also among the new AVLR investors: Tor Minesuk's Mondrian Capital, Noam Gottesman's GLG Partners, and David Harding's Winton Capital Management.

Let's also examine hedge fund activity in other stocks similar to Avalara, Inc. (NYSE:AVLR). We will take a look at CBOE Global Markets Inc (NASDAQ:CBOE), Huazhu Group Limited (NASDAQ:HTHT), Icahn Enterprises LP (NASDAQ:IEP), Franklin Resources, Inc. (NYSE:BEN), Essential Utilities Inc (NYSE:WTRG), Cincinnati Financial Corporation (NASDAQ:CINF), and Hasbro, Inc. (NASDAQ:HAS). This group of stocks' market values resemble AVLR's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CBOE,32,840386,-6 HTHT,17,381209,0 IEP,3,9994902,0 BEN,36,410167,4 WTRG,15,536751,-8 CINF,20,604548,-11 HAS,23,149844,-2 Average,20.9,1845401,-3.3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.9 hedge funds with bullish positions and the average amount invested in these stocks was $1845 million. That figure was $1446 million in AVLR's case. Franklin Resources, Inc. (NYSE:BEN) is the most popular stock in this table. On the other hand Icahn Enterprises LP (NASDAQ:IEP) is the least popular one with only 3 bullish hedge fund positions. Compared to these stocks Avalara, Inc. (NYSE:AVLR) is more popular among hedge funds. Our overall hedge fund sentiment score for AVLR is 81.1. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 returned 23% in 2020 through October 30th but still managed to beat the market by 20.1 percentage points. Hedge funds were also right about betting on AVLR as the stock returned 12% since the end of June (through 10/30) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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