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Hedge Funds Are Buying Axos Financial, Inc. (AX)

Asma UL Husna

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren't usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index's returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you'd fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of 4 percentage points during the first 9 months of 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That's why we are going to go over recent hedge fund activity in Axos Financial, Inc. (NYSE:AX).

Is Axos Financial, Inc. (NYSE:AX) a bargain? Money managers are getting more optimistic. The number of long hedge fund positions went up by 1 recently. Our calculations also showed that AX isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds
5 Most Popular Stocks Among Hedge Funds

In the 21st century investor’s toolkit there are tons of gauges stock market investors have at their disposal to evaluate stocks. A pair of the less utilized gauges are hedge fund and insider trading interest. Our experts have shown that, historically, those who follow the best picks of the best money managers can trounce the broader indices by a solid amount (see the details here).

AX_oct2019
AX_oct2019

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 recent hedge fund action surrounding Axos Financial, Inc. (NYSE:AX).

What does smart money think about Axos Financial, Inc. (NYSE:AX)?

Heading into the third quarter of 2019, a total of 14 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 8% from the first quarter of 2019. On the other hand, there were a total of 10 hedge funds with a bullish position in AX a year ago. With hedgies' positions undergoing their usual ebb and flow, there exists an "upper tier" of noteworthy hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).

Matthew Lindenbaum Basswood Capital
Matthew Lindenbaum Basswood Capital

When looking at the institutional investors followed by Insider Monkey, Basswood Capital, managed by Matthew Lindenbaum, holds the most valuable position in Axos Financial, Inc. (NYSE:AX). Basswood Capital has a $13.1 million position in the stock, comprising 0.8% of its 13F portfolio. The second largest stake is held by Royce & Associates, led by Chuck Royce, holding a $12.3 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Remaining peers that are bullish encompass D. E. Shaw's D E Shaw, John Osterweis's Osterweis Capital Management and Israel Englander's Millennium Management.

As one would reasonably expect, some big names were breaking ground themselves. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, created the most outsized position in Axos Financial, Inc. (NYSE:AX). Arrowstreet Capital had $1 million invested in the company at the end of the quarter. Peter Algert and Kevin Coldiron's Algert Coldiron Investors also initiated a $0.6 million position during the quarter. The only other fund with a new position in the stock is Paul Tudor Jones's Tudor Investment Corp.

Let's now review hedge fund activity in other stocks similar to Axos Financial, Inc. (NYSE:AX). These stocks are CorVel Corporation (NASDAQ:CRVL), Apellis Pharmaceuticals, Inc. (NASDAQ:APLS), Evoqua Water Technologies Corp. (NYSE:AQUA), and SunPower Corporation (NASDAQ:SPWR). This group of stocks' market values are closest to AX's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CRVL,15,174349,-1 APLS,17,341186,-2 AQUA,13,116842,0 SPWR,10,72363,1 Average,13.75,176185,-0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.75 hedge funds with bullish positions and the average amount invested in these stocks was $176 million. That figure was $49 million in AX's case. Apellis Pharmaceuticals, Inc. (NASDAQ:APLS) is the most popular stock in this table. On the other hand SunPower Corporation (NASDAQ:SPWR) is the least popular one with only 10 bullish hedge fund positions. Axos Financial, Inc. (NYSE:AX) 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. 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 AX wasn't nearly as popular as these 20 stocks and hedge funds that were betting on AX were disappointed as the stock returned 1.5% 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 this year.

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

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