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Did Hedge Funds Make The Right Call On AppFolio Inc (APPF)?

Insider Monkey has processed numerous 13F filings of hedge funds and successful value investors to create an extensive database of hedge fund holdings. The 13F filings show the hedge funds’ and successful investors’ positions as of the end of the first quarter. You can find articles about an individual hedge fund’s trades on numerous financial news websites. However, in this article we will take a look at their collective moves over the last 4.5 years and analyze what the smart money thinks of AppFolio Inc (NASDAQ:APPF) based on that data and determine whether they were really smart about the stock.

AppFolio Inc (NASDAQ:APPF) was in 19 hedge funds’ portfolios at the end of the first quarter of 2020. APPF investors should pay attention to an increase in hedge fund sentiment of late. There were 16 hedge funds in our database with APPF positions at the end of the previous quarter. Our calculations also showed that APPF isn’t among the 30 most popular stocks among hedge funds (click for Q1 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 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 58 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.

TUDOR INVESTMENT CORP

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Now we’re going to view the fresh hedge fund action encompassing AppFolio Inc (NASDAQ:APPF).

What does smart money think about AppFolio Inc (NASDAQ:APPF)?

Heading into the second quarter of 2020, a total of 19 of the hedge funds tracked by Insider Monkey were long this stock, a change of 19% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in APPF over the last 18 quarters. With hedgies’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were upping their stakes substantially (or already accumulated large positions).

Is APPF A Good Stock To Buy?

The largest stake in AppFolio Inc (NASDAQ:APPF) was held by Ashe Capital, which reported holding $198.8 million worth of stock at the end of September. It was followed by Echo Street Capital Management with a $33.5 million position. Other investors bullish on the company included Diker Management, Gobi Capital, and Ancora Advisors. In terms of the portfolio weights assigned to each position Ashe Capital allocated the biggest weight to AppFolio Inc (NASDAQ:APPF), around 18.4% of its 13F portfolio. Diker Management is also relatively very bullish on the stock, designating 4.38 percent of its 13F equity portfolio to APPF.

As industrywide interest jumped, specific money managers have jumped into AppFolio Inc (NASDAQ:APPF) headfirst. Diker Management, managed by Mark N. Diker, created the largest position in AppFolio Inc (NASDAQ:APPF). Diker Management had $10.4 million invested in the company at the end of the quarter. Bo Shan’s Gobi Capital also initiated a $9.9 million position during the quarter. The other funds with new positions in the stock are Frederick DiSanto’s Ancora Advisors, Peter Algert and Kevin Coldiron’s Algert Coldiron Investors, and Paul Tudor Jones’s Tudor Investment Corp.

Let’s also examine hedge fund activity in other stocks similar to AppFolio Inc (NASDAQ:APPF). These stocks are Iovance Biotherapeutics, Inc. (NASDAQ:IOVA), Integra Lifesciences Holdings Corp (NASDAQ:IART), Healthcare Realty Trust Inc (NYSE:HR), and East West Bancorp, Inc. (NASDAQ:EWBC). This group of stocks’ market caps are closest to APPF’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
IOVA 39 1344741 7
IART 22 106793 5
HR 11 37769 -1
EWBC 25 180356 -4
Average 24.25 417415 1.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.25 hedge funds with bullish positions and the average amount invested in these stocks was $417 million. That figure was $272 million in APPF’s case. Iovance Biotherapeutics, Inc. (NASDAQ:IOVA) is the most popular stock in this table. On the other hand Healthcare Realty Trust Inc (NYSE:HR) is the least popular one with only 11 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 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 18.6% in 2020 through July 27th but beat the market by 17.1 percentage points. A small number of hedge funds were also right about betting on APPF, though not to the same extent, as the stock returned 27.2% since Q1 and outperformed the market.

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