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How Did American Water Works Company, Inc. (AWK) Compare Against Top Hedge Fund Stocks in 2019?

Abigail Fisher

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren't usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index's returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you'd fail to beat the market. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of more than 10 percentage points so far in 2019. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That's why we are going to go over recent hedge fund activity in American Water Works Company, Inc. (NYSE:AWK).

American Water Works Company, Inc. (NYSE:AWK) investors should pay attention to an increase in activity from the world's largest hedge funds of late. AWK was in 35 hedge funds' portfolios at the end of the third quarter of 2019. There were 23 hedge funds in our database with AWK positions at the end of the previous quarter. Our calculations also showed that AWK isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video at the end of this article for Q2 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

[caption id="attachment_255014" align="aligncenter" width="450"] Clint Carlson of Carlson Capital[/caption]

We leave no stone unturned when looking for the next great investment idea. For example one of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager's investor letter and the stock is still extremely cheap despite already gaining 20 percent. Now let's take a look at the fresh hedge fund action encompassing American Water Works Company, Inc. (NYSE:AWK).

What have hedge funds been doing with American Water Works Company, Inc. (NYSE:AWK)?

At the end of the third quarter, a total of 35 of the hedge funds tracked by Insider Monkey were long this stock, a change of 52% from the second quarter of 2019. Below, you can check out the change in hedge fund sentiment towards AWK over the last 17 quarters. With the smart money's sentiment swirling, there exists an "upper tier" of key hedge fund managers who were upping their stakes meaningfully (or already accumulated large positions).

The largest stake in American Water Works Company, Inc. (NYSE:AWK) was held by Impax Asset Management, which reported holding $260 million worth of stock at the end of September. It was followed by AQR Capital Management with a $139.6 million position. Other investors bullish on the company included Citadel Investment Group, Luminus Management, and Two Sigma Advisors. In terms of the portfolio weights assigned to each position Blackstart Capital allocated the biggest weight to American Water Works Company, Inc. (NYSE:AWK), around 6.72% of its 13F portfolio. Trellus Management Company is also relatively very bullish on the stock, earmarking 6.43 percent of its 13F equity portfolio to AWK.

Now, key money managers were leading the bulls' herd. Blackstart Capital, managed by Brian Olson, Baehyun Sung, and Jamie Waters, established the largest position in American Water Works Company, Inc. (NYSE:AWK). Blackstart Capital had $12.8 million invested in the company at the end of the quarter. Clint Carlson's Carlson Capital also initiated a $10.4 million position during the quarter. The following funds were also among the new AWK investors: David Harding's Winton Capital Management, David E. Shaw's D E Shaw, and Donald Sussman's Paloma Partners.

Let's also examine hedge fund activity in other stocks similar to American Water Works Company, Inc. (NYSE:AWK). These stocks are Aptiv PLC (NYSE:APTV), Verisign, Inc. (NASDAQ:VRSN), Corning Incorporated (NYSE:GLW), and Telefonica Brasil SA (NYSE:VIV). This group of stocks' market values are closest to AWK's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position APTV,27,887545,1 VRSN,30,5568484,-2 GLW,27,203363,1 VIV,13,92351,1 Average,24.25,1687936,0.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.25 hedge funds with bullish positions and the average amount invested in these stocks was $1688 million. That figure was $652 million in AWK's case. Verisign, Inc. (NASDAQ:VRSN) is the most popular stock in this table. On the other hand Telefonica Brasil SA (NYSE:VIV) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks American Water Works Company, Inc. (NYSE:AWK) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.1% in 2019 through December 23rd and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. Hedge funds were also right about betting on AWK, though not to the same extent, as the stock returned 36.2% during the same period and outperformed the market as well. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

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