"Market volatility has picked up again over the past few weeks. Headlines highlight risks regarding interest rates, the Fed, China, house prices, auto sales, trade wars, and more. Uncertainty abounds. But doesn’t it always? I have no view on whether the recent volatility will continue for a while, or whether the market will be back at all-time highs before we know it. I remain focused on preserving and growing our capital, and continue to believe that the best way to do so is via a value-driven, concentrated, patient approach. I shun consensus holdings, rich valuations, and market fads, in favor of solid, yet frequently off-the-beaten-path, businesses run by excellent, aligned management teams, purchased at deep discounts to intrinsic value," are the words of Maran Capital's Dan Roller. His stock picks have been beating the S&P 500 Index handily. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards AZZ Incorporated (NYSE:AZZ) and see how it was affected.
AZZ Incorporated (NYSE:AZZ) investors should pay attention to an increase in enthusiasm from smart money in recent months. AZZ was in 14 hedge funds' portfolios at the end of the third quarter of 2018. There were 10 hedge funds in our database with AZZ holdings at the end of the previous quarter. Our calculations also showed that AZZ isn't among the 30 most popular stocks among hedge funds.
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 market by 18 percentage points since May 2014 through December 3, 2018 (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 our short portfolio.
Let's check out the fresh hedge fund action encompassing AZZ Incorporated (NYSE:AZZ).
How have hedgies been trading AZZ Incorporated (NYSE:AZZ)?
At Q3's end, a total of 14 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 40% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in AZZ over the last 13 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Rutabaga Capital Management was the largest shareholder of AZZ Incorporated (NYSE:AZZ), with a stake worth $14.8 million reported as of the end of September. Trailing Rutabaga Capital Management was Renaissance Technologies, which amassed a stake valued at $8.5 million. Citadel Investment Group, D E Shaw, and GAMCO Investors were also very fond of the stock, giving the stock large weights in their portfolios.
Consequently, key money managers were leading the bulls' herd. Millennium Management, managed by Israel Englander, initiated the most valuable position in AZZ Incorporated (NYSE:AZZ). Millennium Management had $1.8 million invested in the company at the end of the quarter. John Overdeck and David Siegel's Two Sigma Advisors also made a $0.2 million investment in the stock during the quarter. The other funds with new positions in the stock are Brandon Haley's Holocene Advisors and Benjamin A. Smith's Laurion Capital Management.
Let's now take a look at hedge fund activity in other stocks similar to AZZ Incorporated (NYSE:AZZ). These stocks are Cardiovascular Systems Inc (NASDAQ:CSII), CBIZ, Inc. (NYSE:CBZ), Fitbit Inc (NYSE:FIT), and OceanFirst Financial Corp. (NASDAQ:OCFC). This group of stocks' market caps are similar to AZZ's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CSII,22,184900,3 CBZ,15,181773,3 FIT,17,85762,-3 OCFC,15,91004,2 Average,17.25,135860,1.25 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 17.25 hedge funds with bullish positions and the average amount invested in these stocks was $136 million. That figure was $46 million in AZZ's case. Cardiovascular Systems Inc (NASDAQ:CSII) is the most popular stock in this table. On the other hand CBIZ, Inc. (NYSE:CBZ) is the least popular one with only 15 bullish hedge fund positions. Compared to these stocks AZZ Incorporated (NYSE:AZZ) is even less popular than CBZ. Considering that hedge funds aren't fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn't behind this stock. This isn't necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.
Disclosure: None. This article was originally published at Insider Monkey.