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Did Hedge Funds Drop The Ball On Axon Enterprise, Inc. (AAXN) ?

Debasis Saha

Hedge funds are known to underperform the bull markets but that's not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. Hedge funds underperform because they are hedged. The Standard and Poor’s 500 Total Return Index ETFs returned 27.5% through the end of November. Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same period. An average long/short hedge fund returned only a fraction of this due to the hedges they implement and the large fees they charge. Our research covering the last 18 years indicates that investors can outperform the market by imitating hedge funds' consensus stock picks rather than directly investing in hedge funds. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Axon Enterprise, Inc. (NASDAQ:AAXN).

Is Axon Enterprise, Inc. (NASDAQ:AAXN) the right investment to pursue these days? The best stock pickers are in a pessimistic mood. The number of bullish hedge fund bets were cut by 2 recently. Our calculations also showed that AAXN 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.

5 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' 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_670343" align="alignnone" width="1613"] Colin Moran of Abdiel Capital Advisors[/caption]

Colin Moran Abdiel Capital

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 look at the latest hedge fund action regarding Axon Enterprise, Inc. (NASDAQ:AAXN).

How have hedgies been trading Axon Enterprise, Inc. (NASDAQ:AAXN)?

At the end of the third quarter, a total of 14 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -13% from the previous quarter. The graph below displays the number of hedge funds with bullish position in AAXN 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.

Is AAXN A Good Stock To Buy?

More specifically, Abdiel Capital Advisors was the largest shareholder of Axon Enterprise, Inc. (NASDAQ:AAXN), with a stake worth $105.6 million reported as of the end of September. Trailing Abdiel Capital Advisors was Broadwood Capital, which amassed a stake valued at $43.2 million. Polar Capital, Balyasny Asset Management, and Millennium Management 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 Abdiel Capital Advisors allocated the biggest weight to Axon Enterprise, Inc. (NASDAQ:AAXN), around 6.49% of its 13F portfolio. Broadwood Capital is also relatively very bullish on the stock, earmarking 5.99 percent of its 13F equity portfolio to AAXN.

Seeing as Axon Enterprise, Inc. (NASDAQ:AAXN) has experienced declining sentiment from the entirety of the hedge funds we track, it's safe to say that there was a specific group of hedge funds that decided to sell off their positions entirely by the end of the third quarter. Interestingly, Richard Driehaus's Driehaus Capital sold off the largest investment of the 750 funds watched by Insider Monkey, worth about $5 million in stock, and Peter Muller's PDT Partners was right behind this move, as the fund cut about $4.1 million worth. These moves are interesting, as total hedge fund interest fell by 2 funds by the end of the third quarter.

Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Axon Enterprise, Inc. (NASDAQ:AAXN) but similarly valued. These stocks are Tegna Inc (NYSE:TGNA), Terreno Realty Corporation (NYSE:TRNO), Globant SA (NYSE:GLOB), and Sanderson Farms, Inc. (NASDAQ:SAFM). This group of stocks' market values are similar to AAXN's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TGNA,18,359437,3 TRNO,10,51158,1 GLOB,16,70256,2 SAFM,23,410866,3 Average,16.75,222929,2.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.75 hedge funds with bullish positions and the average amount invested in these stocks was $223 million. That figure was $209 million in AAXN's case. Sanderson Farms, Inc. (NASDAQ:SAFM) is the most popular stock in this table. On the other hand Terreno Realty Corporation (NYSE:TRNO) is the least popular one with only 10 bullish hedge fund positions. Axon Enterprise, Inc. (NASDAQ:AAXN) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on AAXN as the stock returned 30% during the first two months of Q4 and outperformed the market by an even larger margin.

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

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