Did Hedge Funds Drop The Ball On Axon Enterprise, Inc. (AAXN) ?

Hedge funds are known to underperform the bull markets but that’s not because they are terrible at stock picking. Hedge funds underperform because their net exposure in only 40-70% and they charge exorbitant fees. No one knows what the future holds and how market participants will react to the bountiful news that floods in each day. However, hedge funds’ consensus picks on average deliver market beating returns. For example in the first 5 months of this year through May 30th the Standard and Poor’s 500 Index returned approximately 12.1% (including dividend payments). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 18.7% during the same 5-month period, with the majority of these stock picks outperforming the broader market benchmark. Interestingly, an average long/short hedge fund returned only a fraction of this value due to the hedges they implemented and the large fees they charged. If you pay attention to the actual hedge fund returns versus the returns of their long stock picks, you might believe that it is a waste of time to analyze hedge funds’ purchases. We know better. That’s why we scrutinize hedge fund sentiment before we invest in a stock like Axon Enterprise, Inc. (NASDAQ:AAXN).

Axon Enterprise, Inc. (NASDAQ:AAXN) investors should pay attention to an increase in enthusiasm from smart money in recent months. Our calculations also showed that AAXN isn’t among the 30 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’ 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.

Andrew Sandler

We’re going to take a look at the key hedge fund action regarding Axon Enterprise, Inc. (NASDAQ:AAXN).

How are hedge funds trading Axon Enterprise, Inc. (NASDAQ:AAXN)?

Heading into the second quarter of 2019, a total of 19 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 19% from the fourth quarter of 2018. On the other hand, there were a total of 17 hedge funds with a bullish position in AAXN a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with AAXN Positions

More specifically, Abdiel Capital Advisors was the largest shareholder of Axon Enterprise, Inc. (NASDAQ:AAXN), with a stake worth $115.5 million reported as of the end of March. Trailing Abdiel Capital Advisors was Broadwood Capital, which amassed a stake valued at $41.4 million. Polar Capital, Sandler Capital Management, and Millennium Management were also very fond of the stock, giving the stock large weights in their portfolios.

As industrywide interest jumped, specific money managers were breaking ground themselves. Portolan Capital Management, managed by George McCabe, initiated the largest position in Axon Enterprise, Inc. (NASDAQ:AAXN). Portolan Capital Management had $5.4 million invested in the company at the end of the quarter. Ram Seshan Venkateswaran’s Vernier Capital also initiated a $2.2 million position during the quarter. The other funds with new positions in the stock are Josh Goldberg’s G2 Investment Partners Management, Benjamin A. Smith’s Laurion Capital Management, and Noam Gottesman’s GLG Partners.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Axon Enterprise, Inc. (NASDAQ:AAXN) but similarly valued. We will take a look at Navistar International Corp (NYSE:NAV), RLI Corp. (NYSE:RLI), AMC Networks Inc (NASDAQ:AMCX), and Generac Holdings Inc. (NYSE:GNRC). This group of stocks’ market valuations match AAXN’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NAV 23 1335795 3
RLI 13 140748 1
AMCX 20 259491 1
GNRC 17 144727 -4
Average 18.25 470190 0.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.25 hedge funds with bullish positions and the average amount invested in these stocks was $470 million. That figure was $248 million in AAXN’s case. Navistar International Corp (NYSE:NAV) is the most popular stock in this table. On the other hand RLI Corp. (NYSE:RLI) is the least popular one with only 13 bullish hedge fund positions. Axon Enterprise, Inc. (NASDAQ:AAXN) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on AAXN as the stock returned 25.1% during the same period and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.

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