At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). We reversed our stance on March 25th after seeing unprecedented fiscal and monetary stimulus unleashed by the Fed and the Congress. This is the perfect market for stock pickers, now that the stocks are fully valued again. In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards American Water Works Company, Inc. (NYSE:AWK) at the end of the second quarter and determine whether the smart money was really smart about this stock.
American Water Works Company, Inc. (NYSE:AWK) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 30 hedge funds' portfolios at the end of June. Our calculations also showed that AWK 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). At the end of this article we will also compare AWK to other stocks including XP Inc. (NASDAQ:XP), The Williams Companies, Inc. (NYSE:WMB), and Ecopetrol S.A. (NYSE:EC) to get a better sense of its popularity. 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 56 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 34% through August 17th. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Phillip Gross of Adage Capital
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Keeping this in mind let's go over the recent hedge fund action surrounding American Water Works Company, Inc. (NYSE:AWK).
What have hedge funds been doing with American Water Works Company, Inc. (NYSE:AWK)?
At the end of June, a total of 30 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. The graph below displays the number of hedge funds with bullish position in AWK over the last 20 quarters. With the smart money's positions undergoing their usual ebb and flow, there exists a few noteworthy hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).
According to Insider Monkey's hedge fund database, Ian Simm's Impax Asset Management has the biggest position in American Water Works Company, Inc. (NYSE:AWK), worth close to $373.6 million, comprising 3.8% of its total 13F portfolio. The second largest stake is held by AQR Capital Management, managed by Cliff Asness, which holds a $56.8 million position; 0.1% of its 13F portfolio is allocated to the company. Other members of the smart money that hold long positions consist of Israel Englander's Millennium Management, D. E. Shaw's D E Shaw and John Overdeck and David Siegel's Two Sigma Advisors. In terms of the portfolio weights assigned to each position Trellus Management Company allocated the biggest weight to American Water Works Company, Inc. (NYSE:AWK), around 7.19% of its 13F portfolio. Impax Asset Management is also relatively very bullish on the stock, dishing out 3.83 percent of its 13F equity portfolio to AWK.
Seeing as American Water Works Company, Inc. (NYSE:AWK) has faced bearish sentiment from the smart money, we can see that there exists a select few hedgies that slashed their full holdings in the second quarter. At the top of the heap, Renaissance Technologies said goodbye to the largest position of all the hedgies tracked by Insider Monkey, comprising close to $89.3 million in stock, and Sara Nainzadeh's Centenus Global Management was right behind this move, as the fund cut about $3.6 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as American Water Works Company, Inc. (NYSE:AWK) but similarly valued. We will take a look at XP Inc. (NASDAQ:XP), The Williams Companies, Inc. (NYSE:WMB), Ecopetrol S.A. (NYSE:EC), Fortive Corporation (NYSE:FTV), China Telecom Corporation Limited (NYSE:CHA), Banco Bilbao Vizcaya Argentaria SA (NYSE:BBVA), and Ball Corporation (NYSE:BLL). All of these stocks' market caps are closest to AWK's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position XP,21,430821,8 WMB,41,466723,-6 EC,11,113508,-1 FTV,35,1372140,0 CHA,5,30145,0 BBVA,11,164405,3 BLL,38,767527,-3 Average,23.1,477896,0.1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 23.1 hedge funds with bullish positions and the average amount invested in these stocks was $478 million. That figure was $653 million in AWK's case. The Williams Companies, Inc. (NYSE:WMB) is the most popular stock in this table. On the other hand China Telecom Corporation Limited (NYSE:CHA) is the least popular one with only 5 bullish hedge fund positions. American Water Works Company, Inc. (NYSE:AWK) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for AWK is 62.2. 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. 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 23.8% in 2020 through September 14th and still beat the market by 17.6 percentage points. Hedge funds were also right about betting on AWK as the stock returned 11.5% during Q3 (through September 14th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
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Disclosure: None. This article was originally published at Insider Monkey.