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Were Hedge Funds Right About Dumping Axsome Therapeutics, Inc. (AXSM)?

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In this article we will analyze whether Axsome Therapeutics, Inc. (NASDAQ:AXSM) is a good investment right now by following the lead of some of the best investors in the world and piggybacking their ideas. There's no better way to get these firms' immense resources and analytical capabilities working for us than to follow their lead into their best ideas. While not all of these picks will be winners, our research shows that these picks historically outperformed the market by double digits annually.

Axsome Therapeutics, Inc. (NASDAQ:AXSM) has seen a decrease in support from the world's most elite money managers of late. Axsome Therapeutics, Inc. (NASDAQ:AXSM) was in 17 hedge funds' portfolios at the end of the first quarter of 2021. The all time high for this statistic is 31. Our calculations also showed that AXSM isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings).

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' 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 S&P 500 ETFs by 115 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 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.

Ian Wace Marshall Wace
Ian Wace Marshall Wace

Ian Wace of Marshall Wace

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, pet market is growing at a 7% annual rate and is expected to reach $110 billion in 2021. So, we are checking out the 5 best stocks for animal lovers. We go through lists like the 15 best Jim Cramer stocks to identify the next Tesla that will deliver outsized returns. 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 homepage. Now let's analyze the fresh hedge fund action encompassing Axsome Therapeutics, Inc. (NASDAQ:AXSM).

Do Hedge Funds Think AXSM Is A Good Stock To Buy Now?

At the end of March, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, a change of -23% from the previous quarter. By comparison, 24 hedge funds held shares or bullish call options in AXSM a year ago. With the smart money's sentiment swirling, there exists an "upper tier" of noteworthy hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

Among these funds, Iridian Asset Management held the most valuable stake in Axsome Therapeutics, Inc. (NASDAQ:AXSM), which was worth $136.5 million at the end of the fourth quarter. On the second spot was RA Capital Management which amassed $93.7 million worth of shares. Baker Bros. Advisors, Citadel Investment Group, and Hillhouse Capital 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 Iridian Asset Management allocated the biggest weight to Axsome Therapeutics, Inc. (NASDAQ:AXSM), around 2.33% of its 13F portfolio. RA Capital Management is also relatively very bullish on the stock, setting aside 1.41 percent of its 13F equity portfolio to AXSM.

Judging by the fact that Axsome Therapeutics, Inc. (NASDAQ:AXSM) has witnessed falling interest from the aggregate hedge fund industry, we can see that there is a sect of funds who sold off their full holdings in the first quarter. Intriguingly, Greg Martinez's Parkman Healthcare Partners cut the biggest investment of the 750 funds monitored by Insider Monkey, valued at about $2.5 million in stock. Ting Jia's fund, Octagon Capital Advisors, also sold off its stock, about $1.6 million worth. These transactions are intriguing to say the least, as aggregate hedge fund interest fell by 5 funds in the first quarter.

Let's now review hedge fund activity in other stocks similar to Axsome Therapeutics, Inc. (NASDAQ:AXSM). We will take a look at Heartland Financial USA Inc (NASDAQ:HTLF), CSW Industrials, Inc. (NASDAQ:CSWI), Purple Innovation, Inc. (NASDAQ:PRPL), Criteo SA (NASDAQ:CRTO), Park National Corporation (NYSE:PRK), FB Financial Corporation (NYSE:FBK), and Allscripts Healthcare Solutions Inc (NASDAQ:MDRX). This group of stocks' market values match AXSM's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HTLF,12,45440,2 CSWI,13,35518,0 PRPL,24,762061,-9 CRTO,16,126253,3 PRK,5,4953,1 FBK,10,82989,1 MDRX,24,282702,2 Average,14.9,191417,0 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.9 hedge funds with bullish positions and the average amount invested in these stocks was $191 million. That figure was $354 million in AXSM's case. Purple Innovation, Inc. (NASDAQ:PRPL) is the most popular stock in this table. On the other hand Park National Corporation (NYSE:PRK) is the least popular one with only 5 bullish hedge fund positions. Axsome Therapeutics, Inc. (NASDAQ:AXSM) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for AXSM is 48. 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 positive signal but we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 28.5% in 2021 through July 23rd and beat the market again by 10.1 percentage points. Unfortunately AXSM wasn't nearly as popular as these 5 stocks and hedge funds that were betting on AXSM were disappointed as the stock returned -5.2% since the end of March (through 7/23) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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