Actually, every time I have heard that word it has been used to mean "dumb ass" or "idiot." Maybe someone told Phaded that it meant "asshole" but it doesn't literally mean that. It means that a person is an "asshole"
In other words, you can call someone a pendejo, but their butt isn't a pendejo.
I think the origin of the word is from pubic hair, but in several countries, they even call children pendejos. It is a weird word.