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Is A. O. Smith Corporation (NYSE:AOS) a good place to invest some of your money right now? We can gain invaluable insight to help us answer that question by studying the investment trends of top investors, who employ world-class Ivy League graduates, who are given immense resources and industry contacts to put their financial expertise to work. The top picks of these firms have historically outperformed the market when we account for known risk factors, making them very valuable investment ideas.
Is AOS stock a buy? Hedge funds were taking a bullish view. The number of long hedge fund positions inched up by 1 recently. A. O. Smith Corporation (NYSE:AOS) was in 31 hedge funds' portfolios at the end of the fourth quarter of 2020. 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 Q4 rankings).
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 124 percentage points since March 2017 (see the details here).
John Overdeck of Two Sigma Advisors
At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, we heard that billionaire Peter Thiel is backing this psychedelic-drug startup. So, we are taking a closer look at this space. We go through lists like the 10 best biotech stocks under $10 to identify the next stock with 10x upside potential. 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. Keeping this in mind we're going to review the new hedge fund action regarding A. O. Smith Corporation (NYSE:AOS).
Do Hedge Funds Think AOS Is A Good Stock To Buy Now?
At the end of December, a total of 31 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 3% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in AOS over the last 22 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).
More specifically, Fundsmith LLP was the largest shareholder of A. O. Smith Corporation (NYSE:AOS), with a stake worth $81.6 million reported as of the end of December. Trailing Fundsmith LLP was D E Shaw, which amassed a stake valued at $47.3 million. Arrowstreet Capital, Two Sigma Advisors, and Balyasny Asset Management 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 Cinctive Capital Management allocated the biggest weight to A. O. Smith Corporation (NYSE:AOS), around 0.86% of its 13F portfolio. Neo Ivy Capital is also relatively very bullish on the stock, earmarking 0.69 percent of its 13F equity portfolio to AOS.
Consequently, key hedge funds were breaking ground themselves. Engineers Gate Manager, managed by Greg Eisner, initiated the biggest position in A. O. Smith Corporation (NYSE:AOS). Engineers Gate Manager had $2.2 million invested in the company at the end of the quarter. Joel Greenblatt's Gotham Asset Management also initiated a $1.4 million position during the quarter. The following funds were also among the new AOS investors: Jinghua Yan's TwinBeech Capital, Brandon Haley's Holocene Advisors, and Greg Poole's Echo Street Capital Management.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as A. O. Smith Corporation (NYSE:AOS) but similarly valued. These stocks are Melco Resorts & Entertainment Limited (NASDAQ:MLCO), Pentair plc (NYSE:PNR), Aspen Technology, Inc. (NASDAQ:AZPN), CyrusOne Inc (NASDAQ:CONE), Formula One Group (NASDAQ:FWONA), NiSource Inc. (NYSE:NI), and Watsco Inc (NYSE:WSO). This group of stocks' market caps resemble AOS's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MLCO,30,766350,-4 PNR,29,664762,-5 AZPN,29,1175533,3 CONE,21,280933,-9 FWONA,21,259250,2 NI,23,163551,-1 WSO,24,243018,-5 Average,25.3,507628,-2.7 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 25.3 hedge funds with bullish positions and the average amount invested in these stocks was $508 million. That figure was $292 million in AOS's case. Melco Resorts & Entertainment Limited (NASDAQ:MLCO) is the most popular stock in this table. On the other hand CyrusOne Inc (NASDAQ:CONE) is the least popular one with only 21 bullish hedge fund positions. Compared to these stocks A. O. Smith Corporation (NYSE:AOS) is more popular among hedge funds. Our overall hedge fund sentiment score for AOS is 82.6. 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 30 most popular stocks among hedge funds returned 81.2% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 26 percentage points. These stocks returned 12.2% in 2021 through April 12th but still managed to beat the market by 1.5 percentage points. Hedge funds were also right about betting on AOS as the stock returned 25.4% since the end of December (through 4/12) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.
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Disclosure: None. This article was originally published at Insider Monkey.