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AppFolio Inc (APPF): Are Hedge Funds Right About This Stock?

Reymerlyn Martin

How do we determine whether AppFolio Inc (NASDAQ:APPF) 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.

AppFolio Inc (NASDAQ:APPF) was in 19 hedge funds' portfolios at the end of September. APPF investors should be aware of an increase in activity from the world's largest hedge funds in recent months. There were 17 hedge funds in our database with APPF positions at the end of the previous quarter. Our calculations also showed that APPF isn't among the 30 most popular stocks among hedge funds.

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 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.

John Overdeck of Two Sigma

We're going to check out the new hedge fund action surrounding AppFolio Inc (NASDAQ:APPF).

How are hedge funds trading AppFolio Inc (NASDAQ:APPF)?

At the end of the third quarter, a total of 19 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 12% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards APPF over the last 13 quarters. With the smart money's sentiment swirling, there exists a select group of noteworthy hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

APPF_dec2018

Among these funds, Ashe Capital held the most valuable stake in AppFolio Inc (NASDAQ:APPF), which was worth $107.4 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $42.7 million worth of shares. Moreover, Two Sigma Advisors, Arrowstreet Capital, and Osterweis Capital Management were also bullish on AppFolio Inc (NASDAQ:APPF), allocating a large percentage of their portfolios to this stock.

Consequently, specific money managers have jumped into AppFolio Inc (NASDAQ:APPF) headfirst. Millennium Management, managed by Israel Englander, created the largest position in AppFolio Inc (NASDAQ:APPF). Millennium Management had $5.1 million invested in the company at the end of the quarter. David Costen Haley's HBK Investments also initiated a $2.9 million position during the quarter. The other funds with brand new APPF positions are Paul Marshall and Ian Wace's Marshall Wace LLP, Richard Driehaus's Driehaus Capital, and Alec Litowitz and Ross Laser's Magnetar Capital.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as AppFolio Inc (NASDAQ:APPF) but similarly valued. We will take a look at China Biologic Products Holdings, Inc. (NASDAQ:CBPO), Esterline Technologies Corporation (NYSE:ESL), Mercury Systems Inc (NASDAQ:MRCY), and Prospect Capital Corporation (NASDAQ:PSEC). This group of stocks' market caps are closest to APPF's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CBPO,8,256674,-1 ESL,20,523611,1 MRCY,11,35296,3 PSEC,11,46888,1 Average,12.5,215617,1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 12.5 hedge funds with bullish positions and the average amount invested in these stocks was $216 million. That figure was $216 million in APPF's case. Esterline Technologies Corporation (NYSE:ESL) is the most popular stock in this table. On the other hand China Biologic Products Holdings, Inc. (NASDAQ:CBPO) is the least popular one with only 8 bullish hedge fund positions. AppFolio Inc (NASDAQ:APPF) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. In this regard ESL might be a better candidate to consider a long position.

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

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