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Is Armstrong Flooring, Inc. (AFI) Going to Burn These Hedge Funds?

Reymerlyn Martin

Investing in hedge funds can bring large profits, but it’s not for everybody, since hedge funds are available only for high-net-worth individuals. They generate significant returns for investors to justify their large fees and they allocate a lot of time and employ complex research processes to determine the best stocks to invest in. A particularly interesting group of stocks that hedge funds like is the small-caps. The huge amount of capital does not allow hedge funds to invest a lot in small-caps, but our research showed that their most popular small-cap ideas are less efficiently priced and generate stronger returns than their large- and mega-cap picks and the broader market. That is why we pay special attention to the hedge fund activity in the small-cap space. Nevertheless, it is also possible to find underpriced large-cap stocks by following the hedge funds' moves.

Hedge fund interest in Armstrong Flooring, Inc. (NYSE:AFI) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare AFI to other stocks including PDL Community Bancorp (NASDAQ:PDLB), Covenant Transportation Group, Inc. (NASDAQ:CVTI), and Value Line, Inc. (NASDAQ:VALU) to get a better sense of its popularity. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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 market by 40 percentage points since May 2014 through May 30, 2019 (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.

Jeff Ubben VALUEACT CAPITAL

In addition to following the biggest hedge funds for investment ideas, we also share stock pitches from conferences, investor letters and other sources  like this one where the fund manager is talking about two under the radar 1000% return potential stocks: first one in internet infrastructure and the second in the heart of advertising market. We use hedge fund buy/sell signals to determine whether to conduct in-depth analysis of these stock ideas which take days. Now, we're going to review the fresh hedge fund action regarding Armstrong Flooring, Inc. (NYSE:AFI).

What does smart money think about Armstrong Flooring, Inc. (NYSE:AFI)?

Heading into the third quarter of 2019, a total of 12 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the first quarter of 2019. By comparison, 16 hedge funds held shares or bullish call options in AFI a year ago. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

AFI_nov2019

Of the funds tracked by Insider Monkey, Wilmot B. Harkey and Daniel Mack's Nantahala Capital Management has the biggest position in Armstrong Flooring, Inc. (NYSE:AFI), worth close to $21.3 million, accounting for 0.7% of its total 13F portfolio. Sitting at the No. 2 spot is Mario Gabelli of GAMCO Investors, with a $14.4 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Other peers that hold long positions contain Jeffrey Ubben's ValueAct Capital, D. E. Shaw's D E Shaw and Frederick DiSanto's Ancora Advisors.

Seeing as Armstrong Flooring, Inc. (NYSE:AFI) has faced declining sentiment from hedge fund managers, we can see that there were a few hedgies that decided to sell off their positions entirely heading into Q3. At the top of the heap, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital dumped the biggest investment of the 750 funds tracked by Insider Monkey, worth an estimated $2.4 million in stock, and Chuck Royce's Royce & Associates was right behind this move, as the fund dropped about $0 million worth. These bearish behaviors are important to note, as total hedge fund interest stayed the same (this is a bearish signal in our experience).

Let's go over hedge fund activity in other stocks similar to Armstrong Flooring, Inc. (NYSE:AFI). We will take a look at PDL Community Bancorp (NASDAQ:PDLB), Covenant Transportation Group, Inc. (NASDAQ:CVTI), Value Line, Inc. (NASDAQ:VALU), and Geron Corporation (NASDAQ:GERN). This group of stocks' market values are closest to AFI's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position PDLB,2,2729,0 CVTI,14,18137,3 VALU,2,4082,0 GERN,2,219,-3 Average,5,6292,0 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 5 hedge funds with bullish positions and the average amount invested in these stocks was $6 million. That figure was $68 million in AFI's case. Covenant Transportation Group, Inc. (NASDAQ:CVTI) is the most popular stock in this table. On the other hand PDL Community Bancorp (NASDAQ:PDLB) is the least popular one with only 2 bullish hedge fund positions. Armstrong Flooring, Inc. (NYSE:AFI) is not the most popular stock in this group but hedge fund interest is still above average. 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 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately AFI wasn't nearly as popular as these 20 stocks and hedge funds that were betting on AFI were disappointed as the stock returned -35.1% during the third quarter 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 many of these stocks already outperformed the market so far this year.

Disclosure: None. This article was originally published at Insider Monkey.

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