Before putting in our own effort and resources into finding a good investment, we can quickly utilize hedge fund expertise to give us a quick glimpse of whether that stock could make for a good addition to our portfolios. The odds are not exactly stacked in investors' favor when it comes to beating the market, as evidenced by the fact that less than 49% of the stocks in the S&P 500 did so during the third quarter. The stats were even worse in recent years when most of the advances in the market were due to large gains by FAANG stocks. However, one bright side for individual investors was the strong performance of hedge funds' top consensus picks. This year hedge funds' top 20 stock picks outperformed the S&P 500 Index by 4 percentage points through September 30th. Thus, we can see that the tireless research and efforts of hedge funds to identify winning stocks can work to our advantage when we know how to use the data. While not all of their picks will be winners, our odds are much better following their best stock picks than trying to go it alone.
AppFolio Inc (NASDAQ:APPF) investors should be aware of a decrease in support from the world's most elite money managers in recent months. APPF was in 12 hedge funds' portfolios at the end of the second quarter of 2019. There were 15 hedge funds in our database with APPF holdings at the end of the previous quarter. Our calculations also showed that APPF 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 former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, 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. Let's take a look at the fresh hedge fund action regarding AppFolio Inc (NASDAQ:APPF).
Hedge fund activity in AppFolio Inc (NASDAQ:APPF)
At the end of the second quarter, a total of 12 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -20% from one quarter earlier. On the other hand, there were a total of 17 hedge funds with a bullish position in APPF a year ago. So, let's check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Ashe Capital was the largest shareholder of AppFolio Inc (NASDAQ:APPF), with a stake worth $163.7 million reported as of the end of March. Trailing Ashe Capital was Echo Street Capital Management, which amassed a stake valued at $34.5 million. Renaissance Technologies, Arrowstreet Capital, and AQR Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.
Because AppFolio Inc (NASDAQ:APPF) has faced falling interest from the smart money, it's easy to see that there is a sect of hedge funds who were dropping their entire stakes in the second quarter. At the top of the heap, Israel Englander's Millennium Management cut the largest stake of the "upper crust" of funds tracked by Insider Monkey, worth an estimated $0.6 million in stock. Ken Griffin's fund, Citadel Investment Group, also said goodbye to its stock, about $0.5 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 3 funds in the second quarter.
Let's also examine 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 Grocery Outlet Holding Corp. (NASDAQ:GO), Macquarie Infrastructure Corporation (NYSE:MIC), Methanex Corporation (NASDAQ:MEOH), and Regal Beloit Corporation (NYSE:RBC). All of these stocks' market caps resemble APPF's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position GO,21,152804,21 MIC,28,203080,4 MEOH,17,118229,-5 RBC,17,178292,0 Average,20.75,163101,5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.75 hedge funds with bullish positions and the average amount invested in these stocks was $163 million. That figure was $265 million in APPF's case. Macquarie Infrastructure Corporation (NYSE:MIC) is the most popular stock in this table. On the other hand Methanex Corporation (NASDAQ:MEOH) is the least popular one with only 17 bullish hedge fund positions. Compared to these stocks AppFolio Inc (NASDAQ:APPF) is even less popular than MEOH. Hedge funds dodged a bullet by taking a bearish stance towards APPF. Our calculations showed that the top 20 most popular hedge fund stocks returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately APPF wasn't nearly as popular as these 20 stocks (hedge fund sentiment was very bearish); APPF investors were disappointed as the stock returned -7% 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.