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Were Hedge Funds Right About American Express Company (AXP)?

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).

In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. The financial regulations require hedge funds and wealthy investors that exceeded the $100 million equity holdings threshold to file a report that shows their positions at the end of every quarter. Even though it isn’t the intention, these filings to a certain extent level the playing field for ordinary investors. The latest round of 13F filings disclosed the funds’ positions on December 31st. We at Insider Monkey have made an extensive database of more than 835 of those established hedge funds and famous value investors’ filings. In this article, we analyze how these elite funds and prominent investors traded American Express Company (NYSE:AXP) based on those filings.

Is American Express Company (NYSE:AXP) an attractive investment today? The best stock pickers are betting on the stock. The number of long hedge fund bets increased by 3 lately. Our calculations also showed that AXP isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings). AXP was in 58 hedge funds’ portfolios at the end of December. There were 55 hedge funds in our database with AXP positions at the end of the previous quarter.

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 41 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.

Mario Gabelli of GAMCO Investors

We leave no stone unturned when looking for the next great investment idea. For example, this trader is claiming triple digit returns, so we check out his latest trade recommendations. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences (by the way watch this video if you want to hear one of the best healthcare hedge fund manager’s coronavirus analysis). Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to take a glance at the fresh hedge fund action encompassing American Express Company (NYSE:AXP).

What does smart money think about American Express Company (NYSE:AXP)?

At the end of the fourth quarter, a total of 58 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 5% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards AXP over the last 18 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Berkshire Hathaway was the largest shareholder of American Express Company (NYSE:AXP), with a stake worth $18874 million reported as of the end of September. Trailing Berkshire Hathaway was Fisher Asset Management, which amassed a stake valued at $1713.1 million. Egerton Capital Limited, GAMCO Investors, and D E Shaw 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 Aquamarine Capital Management allocated the biggest weight to American Express Company (NYSE:AXP), around 12.74% of its 13F portfolio. Hi-Line Capital Management is also relatively very bullish on the stock, earmarking 8.67 percent of its 13F equity portfolio to AXP.

As aggregate interest increased, some big names were breaking ground themselves. Ako Capital, managed by Nicolai Tangen, established the most outsized position in American Express Company (NYSE:AXP). Ako Capital had $157.7 million invested in the company at the end of the quarter. Ravi Chopra’s Azora Capital also initiated a $46.6 million position during the quarter. The other funds with new positions in the stock are Robert Pohly’s Samlyn Capital, Brandon Haley’s Holocene Advisors, and Donald Sussman’s Paloma Partners.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as American Express Company (NYSE:AXP) but similarly valued. These stocks are American Tower Corporation (NYSE:AMT), 3M Company (NYSE:MMM), QUALCOMM Incorporated (NASDAQ:QCOM), and United Parcel Service, Inc. (NYSE:UPS). This group of stocks’ market valuations resemble AXP’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
AMT 46 3658378 -6
MMM 46 855763 -6
QCOM 67 3090818 7
UPS 42 975024 -3
Average 50.25 2144996 -2

View table here if you experience formatting issues.

As you can see these stocks had an average of 50.25 hedge funds with bullish positions and the average amount invested in these stocks was $2145 million. That figure was $22554 million in AXP’s case. QUALCOMM Incorporated (NASDAQ:QCOM) is the most popular stock in this table. On the other hand United Parcel Service, Inc. (NYSE:UPS) is the least popular one with only 42 bullish hedge fund positions. American Express Company (NYSE:AXP) is not the most popular stock in this group but hedge fund interest is still above average. 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 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 lost 1.0% in 2020 through April 20th but beat the market by 11 percentage points. Unfortunately AXP wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on AXP were disappointed as the stock returned -31.9% during the same time period 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 many of these stocks already outperformed the market so far this year.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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