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

Nina Todic

We are still in an overall bull market and many stocks that smart money investors were piling into surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Hedge funds' top 3 stock picks returned 41.7% this year and beat the S&P 500 ETFs by 14 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. 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 Axos Financial, Inc. (NYSE:AX).

Axos Financial, Inc. (NYSE:AX) has experienced a decrease in hedge fund sentiment in recent months. AX was in 13 hedge funds' portfolios at the end of the third quarter of 2019. There were 14 hedge funds in our database with AX holdings at the end of the previous quarter. Our calculations also showed that AX 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
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_735636" align="aligncenter" width="473"] Matthew Lindenbaum of Basswood Capital[/caption]

Matthew Lindenbaum Basswood Capital
Matthew Lindenbaum Basswood 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. We're going to analyze the fresh hedge fund action encompassing Axos Financial, Inc. (NYSE:AX).

How have hedgies been trading Axos Financial, Inc. (NYSE:AX)?

At Q3's end, a total of 13 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -7% from the second quarter of 2019. By comparison, 11 hedge funds held shares or bullish call options in AX a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Basswood Capital was the largest shareholder of Axos Financial, Inc. (NYSE:AX), with a stake worth $13.3 million reported as of the end of September. Trailing Basswood Capital was D E Shaw, which amassed a stake valued at $12.4 million. Royce & Associates, Millennium Management, and Arrowstreet Capital 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 Basswood Capital allocated the biggest weight to Axos Financial, Inc. (NYSE:AX), around 0.97% of its 13F portfolio. Algert Coldiron Investors is also relatively very bullish on the stock, dishing out 0.08 percent of its 13F equity portfolio to AX.

Because Axos Financial, Inc. (NYSE:AX) has witnessed a decline in interest from hedge fund managers, we can see that there is a sect of hedgies who were dropping their positions entirely last quarter. Intriguingly, John Osterweis's Osterweis Capital Management sold off the largest position of the 750 funds tracked by Insider Monkey, comprising close to $3.4 million in stock, and John Thiessen's Vertex One Asset Management was right behind this move, as the fund dropped about $1.4 million worth. These moves are interesting, as aggregate hedge fund interest dropped by 1 funds last quarter.

Let's go over hedge fund activity in other stocks similar to Axos Financial, Inc. (NYSE:AX). We will take a look at McGrath RentCorp (NASDAQ:MGRC), Zuora, Inc. (NYSE:ZUO), Central Garden & Pet Company (NASDAQ:CENT), and Hailiang Education Group Inc. (NASDAQ:HLG). All of these stocks' market caps are similar to AX's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MGRC,21,157899,3 ZUO,23,153629,4 CENT,23,154253,4 HLG,3,7374,1 Average,17.5,118289,3 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 17.5 hedge funds with bullish positions and the average amount invested in these stocks was $118 million. That figure was $55 million in AX's case. Zuora, Inc. (NYSE:ZUO) is the most popular stock in this table. On the other hand Hailiang Education Group Inc. (NASDAQ:HLG) is the least popular one with only 3 bullish hedge fund positions. Axos Financial, Inc. (NYSE:AX) 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 AX, though not to the same extent, as the stock returned 6.5% during the first two months of the fourth quarter and outperformed the market.

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

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