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Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards American States Water Co (NYSE:AWR).
Is AWR a good stock to buy now? American States Water Co (NYSE:AWR) has seen an increase in enthusiasm from smart money recently. American States Water Co (NYSE:AWR) was in 21 hedge funds' portfolios at the end of September. The all time high for this statistic is 21. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 20 hedge funds in our database with AWR positions at the end of the second quarter. Our calculations also showed that AWR 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.
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 66 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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Donald Sussman of Paloma Partners
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks 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. Keeping this in mind let's review the key hedge fund action regarding American States Water Co (NYSE:AWR).
Do Hedge Funds Think AWR Is A Good Stock To Buy Now?
At third quarter's end, a total of 21 of the hedge funds tracked by Insider Monkey were long this stock, a change of 5% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards AWR over the last 21 quarters. With the smart money's sentiment swirling, there exists a few notable hedge fund managers who were adding to their stakes significantly (or already accumulated large positions).
More specifically, Renaissance Technologies was the largest shareholder of American States Water Co (NYSE:AWR), with a stake worth $14.9 million reported as of the end of September. Trailing Renaissance Technologies was Millennium Management, which amassed a stake valued at $11.8 million. D E Shaw, Engineers Gate Manager, and AQR Capital 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 Algert Coldiron Investors allocated the biggest weight to American States Water Co (NYSE:AWR), around 0.28% of its 13F portfolio. PDT Partners is also relatively very bullish on the stock, designating 0.17 percent of its 13F equity portfolio to AWR.
As industrywide interest jumped, specific money managers have jumped into American States Water Co (NYSE:AWR) headfirst. Engineers Gate Manager, managed by Greg Eisner, assembled the largest position in American States Water Co (NYSE:AWR). Engineers Gate Manager had $3.5 million invested in the company at the end of the quarter. Brandon Haley's Holocene Advisors also initiated a $0.9 million position during the quarter. The following funds were also among the new AWR investors: Donald Sussman's Paloma Partners, Paul Marshall and Ian Wace's Marshall Wace LLP, and Karim Abbadi and Edward McBride's Centiva Capital.
Let's check out hedge fund activity in other stocks similar to American States Water Co (NYSE:AWR). These stocks are Bank OZK (NASDAQ:OZK), Synaptics Incorporated (NASDAQ:SYNA), WPX Energy Inc (NYSE:WPX), AMN Healthcare Services Inc (NYSE:AMN), Advanced Disposal Services, Inc. (NYSE:ADSW), Spire Inc. (NYSE:SR), and SPS Commerce, Inc. (NASDAQ:SPSC). This group of stocks' market caps are closest to AWR's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position OZK,20,178260,3 SYNA,23,370429,-5 WPX,29,225279,-8 AMN,16,72881,-5 ADSW,22,799197,-3 SR,20,48145,2 SPSC,14,148023,-5 Average,20.6,263173,-3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 20.6 hedge funds with bullish positions and the average amount invested in these stocks was $263 million. That figure was $55 million in AWR's case. WPX Energy Inc (NYSE:WPX) is the most popular stock in this table. On the other hand SPS Commerce, Inc. (NASDAQ:SPSC) is the least popular one with only 14 bullish hedge fund positions. American States Water Co (NYSE:AWR) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for AWR is 59.3. 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 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 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 30.7% in 2020 through December 14th and beat the market again by 15.8 percentage points. Unfortunately AWR wasn't nearly as popular as these 20 stocks and hedge funds that were betting on AWR were disappointed as the stock returned 2.4% since the end of September (through 12/14) 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.
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Disclosure: None. This article was originally published at Insider Monkey.