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Were Hedge Funds Right Selling American Public Education, Inc. (APEI)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards American Public Education, Inc. (NASDAQ:APEI) and determine whether hedge funds skillfully traded this stock.

Is American Public Education, Inc. (NASDAQ:APEI) the right investment to pursue these days? Prominent investors were in a pessimistic mood. The number of long hedge fund bets dropped by 1 in recent months. Our calculations also showed that APEI 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

AQR CAPITAL MANAGEMENT

Cliff Asness of AQR Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, we take a look at lists like the top 20 agriculture producing countries to identify emerging companies that are likely to deliver 1000% gains in the coming years. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. 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. Now we’re going to take a look at the new hedge fund action regarding American Public Education, Inc. (NASDAQ:APEI).

What have hedge funds been doing with American Public Education, Inc. (NASDAQ:APEI)?

Heading into the second quarter of 2020, a total of 13 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -7% from the previous quarter. On the other hand, there were a total of 15 hedge funds with a bullish position in APEI a year ago. With hedge funds’ capital changing hands, there exists a select group of noteworthy hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).

The largest stake in American Public Education, Inc. (NASDAQ:APEI) was held by Renaissance Technologies, which reported holding $28.8 million worth of stock at the end of September. It was followed by AQR Capital Management with a $7.5 million position. Other investors bullish on the company included D E Shaw, Arrowstreet Capital, and Portolan Capital Management. In terms of the portfolio weights assigned to each position Cloverdale Capital Management allocated the biggest weight to American Public Education, Inc. (NASDAQ:APEI), around 2.3% of its 13F portfolio. Portolan Capital Management is also relatively very bullish on the stock, dishing out 0.7 percent of its 13F equity portfolio to APEI.

Due to the fact that American Public Education, Inc. (NASDAQ:APEI) has faced falling interest from the entirety of the hedge funds we track, logic holds that there lies a certain “tier” of hedge funds who were dropping their entire stakes heading into Q4. Interestingly, Israel Englander’s Millennium Management sold off the largest investment of all the hedgies followed by Insider Monkey, totaling an estimated $5 million in stock, and Michael Gelband’s ExodusPoint Capital was right behind this move, as the fund sold off about $0.4 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 1 funds heading into Q4.

Let’s also examine hedge fund activity in other stocks similar to American Public Education, Inc. (NASDAQ:APEI). We will take a look at The First Bancshares, Inc. (NASDAQ:FBMS), Meridian Bioscience, Inc. (NASDAQ:VIVO), Universal Logistics Holdings, Inc. (NASDAQ:ULH), and Designer Brands Inc. (NYSE:DBI). This group of stocks’ market caps are closest to APEI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
FBMS 5 16211 -1
VIVO 20 57229 3
ULH 8 15656 -3
DBI 21 28950 -1
Average 13.5 29512 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 13.5 hedge funds with bullish positions and the average amount invested in these stocks was $30 million. That figure was $61 million in APEI’s case. Designer Brands Inc. (NYSE:DBI) is the most popular stock in this table. On the other hand The First Bancshares, Inc. (NASDAQ:FBMS) is the least popular one with only 5 bullish hedge fund positions. American Public Education, Inc. (NASDAQ:APEI) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and 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 13.3% in 2020 through June 25th and surpassed the market by 16.8 percentage points. Unfortunately APEI wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); APEI investors were disappointed as the stock returned 19.3% during the second quarter 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 most of these stocks already outperformed the market in 2020.

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