Were These Hedge Funds Wrong About Betting On Axis Capital Holdings Limited (AXS)?

Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 823 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about Axis Capital Holdings Limited (NYSE:AXS).

Axis Capital Holdings Limited (NYSE:AXS) has experienced an increase in hedge fund interest lately. Axis Capital Holdings Limited (NYSE:AXS) was in 35 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 34. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 32 hedge funds in our database with AXS holdings at the end of March. Our calculations also showed that AXS isn’t among the 30 most popular stocks among hedge funds (click for Q2 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.

Richard S. Pzena of Pzena Investment Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. We go through lists like the 10 biggest telecom companies to identify fast growing companies in various industries. 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. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now let’s take a look at the latest hedge fund action regarding Axis Capital Holdings Limited (NYSE:AXS).

What does smart money think about Axis Capital Holdings Limited (NYSE:AXS)?

At the end of June, a total of 35 of the hedge funds tracked by Insider Monkey were long this stock, a change of 9% from the previous quarter. On the other hand, there were a total of 27 hedge funds with a bullish position in AXS a year ago. 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, Pzena Investment Management was the largest shareholder of Axis Capital Holdings Limited (NYSE:AXS), with a stake worth $274.4 million reported as of the end of June. Trailing Pzena Investment Management was Renaissance Technologies, which amassed a stake valued at $120.9 million. Paradice Investment Management, Citadel Investment Group, and Samlyn Capital 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 Paradice Investment Management allocated the biggest weight to Axis Capital Holdings Limited (NYSE:AXS), around 5.32% of its 13F portfolio. Cerebellum Capital is also relatively very bullish on the stock, dishing out 2.47 percent of its 13F equity portfolio to AXS.

As industrywide interest jumped, some big names have been driving this bullishness. Alyeska Investment Group, managed by Anand Parekh, initiated the most valuable position in Axis Capital Holdings Limited (NYSE:AXS). Alyeska Investment Group had $12.1 million invested in the company at the end of the quarter. Chuck Royce’s Royce & Associates also made a $12 million investment in the stock during the quarter. The following funds were also among the new AXS investors: Andrew Kurita’s Kettle Hill Capital Management, David Andre and Astro Teller’s Cerebellum Capital, and Richard SchimeláandáLawrence Sapanski’s Cinctive Capital Management.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Axis Capital Holdings Limited (NYSE:AXS) but similarly valued. We will take a look at The Timken Company (NYSE:TKR), Strategic Education Inc (NASDAQ:STRA), PVH Corp (NYSE:PVH), Coty Inc (NYSE:COTY), Seaboard Corporation (NYSE:SEB), Semtech Corporation (NASDAQ:SMTC), and Change Healthcare Inc. (NASDAQ:CHNG). All of these stocks’ market caps are closest to AXS’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 27.4 hedge funds with bullish positions and the average amount invested in these stocks was $368 million. That figure was $662 million in AXS’s case. Change Healthcare Inc. (NASDAQ:CHNG) is the most popular stock in this table. On the other hand Seaboard Corporation (NYSE:SEB) is the least popular one with only 14 bullish hedge fund positions. Axis Capital Holdings Limited (NYSE:AXS) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for AXS is 69.8. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 23% in 2020 through October 30th and beat the market again by 20.1 percentage points. Unfortunately AXS wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on AXS were disappointed as the stock returned 6.2% since the end of June (through 10/30) 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.

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