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Did Hedge Funds Make The Right Call On Axonics Modulation Technologies, Inc. (AXNX) ?

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 Axonics Modulation Technologies, Inc. (NASDAQ:AXNX) and determine whether hedge funds had an edge regarding this stock.

Is Axonics Modulation Technologies, Inc. (NASDAQ:AXNX) a buy, sell, or hold? Hedge funds were taking a pessimistic view. The number of bullish hedge fund positions decreased by 1 recently. Our calculations also showed that AXNX 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.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

James Flynn Deerfield Management

James E. Flynn of Deerfield Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, on one site we found out that NBA champion Isiah Thomas is now the CEO of this cannabis company. The same site also talks about a snack manufacturer that’s growing at 30% annually. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. Keeping this in mind we’re going to take a look at the fresh hedge fund action encompassing Axonics Modulation Technologies, Inc. (NASDAQ:AXNX).

What does smart money think about Axonics Modulation Technologies, Inc. (NASDAQ:AXNX)?

At the end of the first quarter, a total of 22 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -4% from the fourth quarter of 2019. On the other hand, there were a total of 10 hedge funds with a bullish position in AXNX a year ago. With the smart money’s capital changing hands, there exists a select group of noteworthy hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Deerfield Management, managed by James E. Flynn, holds the biggest position in Axonics Modulation Technologies, Inc. (NASDAQ:AXNX). Deerfield Management has a $45.6 million position in the stock, comprising 1.4% of its 13F portfolio. On Deerfield Management’s heels is Jeremy Green of Redmile Group, with a $38.3 million position; the fund has 1.1% of its 13F portfolio invested in the stock. Other professional money managers that are bullish consist of Brian Ashford-Russell and Tim Woolley’s Polar Capital, Steve Cohen’s Point72 Asset Management and Bihua Chen’s Cormorant Asset Management. In terms of the portfolio weights assigned to each position Blackcrane Capital allocated the biggest weight to Axonics Modulation Technologies, Inc. (NASDAQ:AXNX), around 17.43% of its 13F portfolio. Parian Global Management is also relatively very bullish on the stock, dishing out 5.62 percent of its 13F equity portfolio to AXNX.

Seeing as Axonics Modulation Technologies, Inc. (NASDAQ:AXNX) has witnessed falling interest from the aggregate hedge fund industry, it’s easy to see that there exists a select few funds who were dropping their entire stakes last quarter. Intriguingly, Christopher James’s Partner Fund Management dumped the largest stake of all the hedgies tracked by Insider Monkey, totaling close to $15.2 million in stock, and Dmitry Balyasny’s Balyasny Asset Management was right behind this move, as the fund dropped about $12.7 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest was cut by 1 funds last quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Axonics Modulation Technologies, Inc. (NASDAQ:AXNX) but similarly valued. These stocks are Stratasys, Ltd. (NASDAQ:SSYS), Schweitzer-Mauduit International, Inc. (NYSE:SWM), SeaWorld Entertainment Inc (NYSE:SEAS), and Encore Wire Corporation (NASDAQ:WIRE). All of these stocks’ market caps are closest to AXNX’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SSYS 14 60722 -4
SWM 10 25342 -3
SEAS 27 455794 -12
WIRE 14 33051 1
Average 16.25 143727 -4.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.25 hedge funds with bullish positions and the average amount invested in these stocks was $144 million. That figure was $282 million in AXNX’s case. SeaWorld Entertainment Inc (NYSE:SEAS) is the most popular stock in this table. On the other hand Schweitzer-Mauduit International, Inc. (NYSE:SWM) is the least popular one with only 10 bullish hedge fund positions. Axonics Modulation Technologies, Inc. (NASDAQ:AXNX) is not the most popular stock in this group but hedge fund interest is still above 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on AXNX as the stock returned 38.2% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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