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How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding AppFolio Inc (NASDAQ:APPF) and determine whether hedge funds had an edge regarding this stock.
AppFolio Inc (NASDAQ:APPF) investors should be aware of an increase in hedge fund interest recently. AppFolio Inc (NASDAQ:APPF) was in 21 hedge funds' portfolios at the end of June. The all time high for this statistics is 21. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that APPF isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).
Video: Watch our video about the top 5 most popular hedge fund stocks.
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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 percentage points since March 2017 (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 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Matthew Hulsizer of PEAK6 Capital
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this lithium company which could also benefit from the electric car adoption. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Keeping this in mind we're going to take a look at the key hedge fund action surrounding AppFolio Inc (NASDAQ:APPF).
How have hedgies been trading AppFolio Inc (NASDAQ:APPF)?
At second quarter's end, a total of 21 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 11% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in APPF over the last 20 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Among these funds, Ashe Capital held the most valuable stake in AppFolio Inc (NASDAQ:APPF), which was worth $291.9 million at the end of the third quarter. On the second spot was Echo Street Capital Management which amassed $55.5 million worth of shares. Gobi Capital, GLG Partners, and Athanor 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 Ashe Capital allocated the biggest weight to AppFolio Inc (NASDAQ:APPF), around 22.41% of its 13F portfolio. Gobi Capital is also relatively very bullish on the stock, earmarking 1.71 percent of its 13F equity portfolio to APPF.
Consequently, some big names have been driving this bullishness. Athanor Capital, managed by Parvinder Thiara, assembled the most valuable position in AppFolio Inc (NASDAQ:APPF). Athanor Capital had $4 million invested in the company at the end of the quarter. Israel Englander's Millennium Management also made a $2.4 million investment in the stock during the quarter. The other funds with new positions in the stock are Ryan Tolkin (CIO)'s Schonfeld Strategic Advisors, Matthew Hulsizer's PEAK6 Capital Management, and Peter Muller's PDT Partners.
Let's also examine hedge fund activity in other stocks similar to AppFolio Inc (NASDAQ:APPF). We will take a look at Zions Bancorporation, National Association (NASDAQ:ZION), Ingredion Incorporated (NYSE:INGR), Kimco Realty Corp (NYSE:KIM), Teck Resources Ltd (NYSE:TECK), SolarWinds Corporation (NYSE:SWI), Casey's General Stores, Inc. (NASDAQ:CASY), and LHC Group, Inc. (NASDAQ:LHCG). This group of stocks' market valuations match APPF's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ZION,24,66065,-9 INGR,22,226529,4 KIM,28,171160,6 TECK,25,329603,1 SWI,19,2364868,5 CASY,23,152316,0 LHCG,30,159342,3 Average,24.4,495698,1.4 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 24.4 hedge funds with bullish positions and the average amount invested in these stocks was $496 million. That figure was $400 million in APPF's case. LHC Group, Inc. (NASDAQ:LHCG) is the most popular stock in this table. On the other hand SolarWinds Corporation (NYSE:SWI) is the least popular one with only 19 bullish hedge fund positions. AppFolio Inc (NASDAQ:APPF) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for APPF is 46.1. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 24.8% in 2020 through the end of September and surpassed the market by 19.3 percentage points. Unfortunately APPF wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); APPF investors were disappointed as the stock returned -12.8% in 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 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.