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Is AOS A Good Stock To Buy According To Hedge Funds?

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In this article you are going to find out whether hedge funds think A. O. Smith Corporation (NYSE:AOS) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It's not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Is AOS a good stock to buy? A. O. Smith Corporation (NYSE:AOS) has experienced a decrease in hedge fund interest of late. A. O. Smith Corporation (NYSE:AOS) was in 30 hedge funds' portfolios at the end of September. The all time high for this statistic is 35. Our calculations also showed that AOS isn't among the 30 most popular stocks among hedge funds (click for Q3 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.

In today’s marketplace there are dozens of signals stock market investors can use to assess publicly traded companies. A pair of the most innovative signals are hedge fund and insider trading sentiment. Our researchers have shown that, historically, those who follow the best picks of the top hedge fund managers can outclass the broader indices by a significant margin (see the details here).

Jeff Ubben VALUEACT CAPITAL
Jeff Ubben VALUEACT CAPITAL

Jeffrey Ubben of ValueAct Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, the House passed a landmark bill decriminalizing marijuana. So, we are checking out this under the radar cannabis stock right now. We go through lists like the 15 best blue chip stocks to buy 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. Now let's check out the recent hedge fund action surrounding A. O. Smith Corporation (NYSE:AOS).

Do Hedge Funds Think AOS Is A Good Stock To Buy Now?

Heading into the fourth quarter of 2020, a total of 30 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -14% from the second quarter of 2020. Below, you can check out the change in hedge fund sentiment towards AOS over the last 21 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Generation Investment Management, managed by David Blood and Al Gore, holds the largest position in A. O. Smith Corporation (NYSE:AOS). Generation Investment Management has a $165.6 million position in the stock, comprising 0.9% of its 13F portfolio. On Generation Investment Management's heels is ValueAct Capital, managed by Jeffrey Ubben, which holds a $110.5 million position; the fund has 1.6% of its 13F portfolio invested in the stock. Remaining professional money managers that are bullish include Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, 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 ValueAct Capital allocated the biggest weight to A. O. Smith Corporation (NYSE:AOS), around 1.55% of its 13F portfolio. Generation Investment Management is also relatively very bullish on the stock, designating 0.88 percent of its 13F equity portfolio to AOS.

Due to the fact that A. O. Smith Corporation (NYSE:AOS) has experienced a decline in interest from hedge fund managers, it's safe to say that there was a specific group of money managers who sold off their positions entirely by the end of the third quarter. Interestingly, Greg Eisner's Engineers Gate Manager sold off the largest stake of the 750 funds monitored by Insider Monkey, worth about $1.4 million in stock. Donald Sussman's fund, Paloma Partners, also said goodbye to its stock, about $1.2 million worth. These transactions are important to note, as total hedge fund interest dropped by 5 funds by the end of the third quarter.

Let's go over hedge fund activity in other stocks similar to A. O. Smith Corporation (NYSE:AOS). These stocks are Universal Display Corporation (NASDAQ:OLED), Globe Life Inc. (NYSE:GL), MGM Growth Properties LLC (NYSE:MGP), Five9 Inc (NASDAQ:FIVN), LKQ Corporation (NASDAQ:LKQ), NiSource Inc. (NYSE:NI), and Formula One Group (NASDAQ:FWONK). All of these stocks' market caps are similar to AOS's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position OLED,20,95777,-5 GL,31,751195,-2 MGP,30,470854,-2 FIVN,47,1328168,3 LKQ,51,1384655,7 NI,24,306055,3 FWONK,40,1464422,-9 Average,34.7,828732,-0.7 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 34.7 hedge funds with bullish positions and the average amount invested in these stocks was $829 million. That figure was $435 million in AOS's case. LKQ Corporation (NASDAQ:LKQ) is the most popular stock in this table. On the other hand Universal Display Corporation (NASDAQ:OLED) is the least popular one with only 20 bullish hedge fund positions. A. O. Smith Corporation (NYSE:AOS) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for AOS is 41.8. 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 negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 33.3% in 2020 through December 18th and surpassed the market again by 16.4 percentage points. Unfortunately AOS wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); AOS investors were disappointed as the stock returned 5.9% since the end of September (through 12/18) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 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.

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