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

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 American Express Company (NYSE:AXP) and determine whether hedge funds had an edge regarding this stock.

Is American Express Company (NYSE:AXP) a buy right now? Prominent investors were in a bearish mood. The number of long hedge fund positions retreated by 1 in recent months. Our calculations also showed that AXP 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

GREENLIGHT CAPITAL

David Einhorn of Greenlight Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, this trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost gold prices. So, we are checking out this junior gold mining stock. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind we’re going to take a peek at the key hedge fund action surrounding American Express Company (NYSE:AXP).

Hedge fund activity in American Express Company (NYSE:AXP)

Heading into the second quarter of 2020, a total of 57 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -2% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in 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.

Is AXP A Good Stock To Buy?

The largest stake in American Express Company (NYSE:AXP) was held by Berkshire Hathaway, which reported holding $12979.4 million worth of stock at the end of September. It was followed by Fisher Asset Management with a $1201.9 million position. Other investors bullish on the company included Viking Global, Egerton Capital Limited, and Ako Capital. In terms of the portfolio weights assigned to each position Aquamarine Capital Management allocated the biggest weight to American Express Company (NYSE:AXP), around 12.26% of its 13F portfolio. Hi-Line Capital Management is also relatively very bullish on the stock, dishing out 8.58 percent of its 13F equity portfolio to AXP.

Due to the fact that American Express Company (NYSE:AXP) has experienced declining sentiment from hedge fund managers, logic holds that there were a few hedge funds who sold off their full holdings by the end of the first quarter. Intriguingly, Patrick Degorce’s Theleme Partners said goodbye to the biggest investment of all the hedgies watched by Insider Monkey, valued at an estimated $145.7 million in stock, and Ravi Chopra’s Azora Capital was right behind this move, as the fund sold off about $46.6 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 1 funds by the end of the first quarter.

Let’s also examine hedge fund activity in other stocks similar to American Express Company (NYSE:AXP). We will take a look at BlackRock, Inc. (NYSE:BLK), Coca-Cola FEMSA, S.A.B. de C.V. (NYSE:KOF), Cigna Corporation (NYSE:CI), and PetroChina Company Limited (NYSE:PTR). This group of stocks’ market valuations match AXP’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BLK 38 678087 -5
KOF 7 325265 -3
CI 74 2988126 2
PTR 7 66671 -6
Average 31.5 1014537 -3

View table here if you experience formatting issues.

As you can see these stocks had an average of 31.5 hedge funds with bullish positions and the average amount invested in these stocks was $1015 million. That figure was $15414 million in AXP’s case. Cigna Corporation (NYSE:CI) is the most popular stock in this table. On the other hand Coca-Cola FEMSA, S.A.B. de C.V. (NYSE:KOF) is the least popular one with only 7 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 gained 12.3% in 2020 through June 30th but beat the market by 15.5 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 11.8% 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.

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