Was The Smart Money Right About Souring On American Express Company (AXP)?

Reymerlyn Martin
·6 min read

Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors' consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of American Express Company (NYSE:AXP).

Is American Express Company (NYSE:AXP) ready to rally soon? The best stock pickers were getting less optimistic. The number of bullish hedge fund bets were trimmed by 3 recently. American Express Company (NYSE:AXP) was in 54 hedge funds' portfolios at the end of June. The all time high for this statistics is 58. Our calculations also showed that AXP 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.

Eashwar Krishnan - Tybourne Capital
Eashwar Krishnan - Tybourne Capital

Eashwar Krishnan of Tybourne Capital Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than quadrupled this year. We are trying to identify other EV revolution winners, so we are checking out this under-the-radar lithium stock. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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. With all of this in mind we're going to go over the latest hedge fund action encompassing American Express Company (NYSE:AXP).

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

Heading into the third quarter of 2020, a total of 54 of the hedge funds tracked by Insider Monkey were long this stock, a change of -5% from the first quarter of 2020. By comparison, 45 hedge funds held shares or bullish call options in AXP a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in American Express Company (NYSE:AXP) was held by Berkshire Hathaway, which reported holding $14433.3 million worth of stock at the end of September. It was followed by Fisher Asset Management with a $1390.7 million position. Other investors bullish on the company included Viking Global, Tybourne Capital Management, and Citadel Investment Group. In terms of the portfolio weights assigned to each position Aquamarine Capital Management allocated the biggest weight to American Express Company (NYSE:AXP), around 14.56% of its 13F portfolio. Hi-Line Capital Management is also relatively very bullish on the stock, dishing out 7.98 percent of its 13F equity portfolio to AXP.

Seeing as American Express Company (NYSE:AXP) has witnessed falling interest from the entirety of the hedge funds we track, logic holds that there were a few hedge funds that slashed their positions entirely in the second quarter. At the top of the heap, John Armitage's Egerton Capital Limited sold off the largest investment of the 750 funds followed by Insider Monkey, valued at about $169.7 million in stock, and Nicolai Tangen's Ako Capital was right behind this move, as the fund dropped about $130.7 million worth. These transactions are interesting, as aggregate hedge fund interest dropped by 3 funds in the second quarter.

Let's now take a look at hedge fund activity in other stocks similar to American Express Company (NYSE:AXP). We will take a look at Morgan Stanley (NYSE:MS), Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX), Coca-Cola FEMSA, S.A.B. de C.V. (NYSE:KOF), Mondelez International Inc (NASDAQ:MDLZ), Altria Group Inc (NYSE:MO), Zoom Video Communications, Inc. (NASDAQ:ZM), and Becton, Dickinson and Company (NYSE:BDX). This group of stocks' market values are closest to AXP's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MS,61,4357171,-9 VRTX,54,3477688,-2 KOF,5,358015,-2 MDLZ,54,2594722,0 MO,43,1289543,-3 ZM,48,6758811,1 BDX,53,1971353,-3 Average,45.4,2972472,-2.6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 45.4 hedge funds with bullish positions and the average amount invested in these stocks was $2972 million. That figure was $17635 million in AXP's case. Morgan Stanley (NYSE:MS) 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 5 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. Our overall hedge fund sentiment score for AXP is 73.7. 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 30% in 2020 through October 23rd and beat the market by 21 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 7% since the end of June (through 10/23) 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.

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