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Hedge Funds Are Dumping Armstrong World Industries, Inc. (AWI)

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In this article we will check out the progression of hedge fund sentiment towards Armstrong World Industries, Inc. (NYSE:AWI) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

Is Armstrong World Industries, Inc. (NYSE:AWI) undervalued? Money managers were becoming less confident. The number of long hedge fund bets were cut by 6 in recent months. Armstrong World Industries, Inc. (NYSE:AWI) was in 25 hedge funds' portfolios at the end of the first quarter of 2021. The all time high for this statistic is 37. Our calculations also showed that AWI isn't among the 30 most popular stocks among hedge funds (click for Q1 rankings). There were 31 hedge funds in our database with AWI holdings at the end of December.

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 115 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

William Von Mueffling - Cantillon Capital Management
William Von Mueffling - Cantillon Capital Management

William Von Mueffling of Cantillon Capital Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, economists warn of inflation flare up. So, we are checking out this backdoor gold play that has hit peak gains of 718% in a little over a year. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. 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 homepage. Keeping this in mind we're going to take a look at the latest hedge fund action regarding Armstrong World Industries, Inc. (NYSE:AWI).

Do Hedge Funds Think AWI Is A Good Stock To Buy Now?

At Q1's end, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of -19% from the previous quarter. On the other hand, there were a total of 20 hedge funds with a bullish position in AWI a year ago. With the smart money's sentiment swirling, there exists an "upper tier" of noteworthy hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).

Among these funds, Gates Capital Management held the most valuable stake in Armstrong World Industries, Inc. (NYSE:AWI), which was worth $114.9 million at the end of the fourth quarter. On the second spot was Cantillon Capital Management which amassed $109.4 million worth of shares. Yacktman Asset Management, MIG Capital, and Southpoint Capital Advisors 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 Owls Nest Partners allocated the biggest weight to Armstrong World Industries, Inc. (NYSE:AWI), around 8.15% of its 13F portfolio. MIG Capital is also relatively very bullish on the stock, designating 5.79 percent of its 13F equity portfolio to AWI.

Since Armstrong World Industries, Inc. (NYSE:AWI) has faced a decline in interest from hedge fund managers, logic holds that there exists a select few funds who sold off their entire stakes by the end of the first quarter. Intriguingly, James Dinan's York Capital Management sold off the biggest investment of the 750 funds watched by Insider Monkey, worth an estimated $11.8 million in stock. Anand Parekh's fund, Alyeska Investment Group, also cut its stock, about $5.9 million worth. These moves are important to note, as aggregate hedge fund interest dropped by 6 funds by the end of the first quarter.

Let's now take a look at hedge fund activity in other stocks similar to Armstrong World Industries, Inc. (NYSE:AWI). We will take a look at Healthcare Realty Trust Inc (NYSE:HR), Olink Holding AB (publ) (NASDAQ:OLK), Seaboard Corporation (NYSE:SEB), Alarm.com Holdings Inc (NASDAQ:ALRM), Agree Realty Corporation (NYSE:ADC), KB Home (NYSE:KBH), and Ryman Hospitality Properties, Inc. (NYSE:RHP). All of these stocks' market caps match AWI's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position HR,20,172535,-3 OLK,20,174006,20 SEB,14,125291,1 ALRM,20,315314,0 ADC,18,200418,2 KBH,24,359374,-4 RHP,22,356062,2 Average,19.7,243286,2.6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 19.7 hedge funds with bullish positions and the average amount invested in these stocks was $243 million. That figure was $512 million in AWI's case. KB Home (NYSE:KBH) is the most popular stock in this table. On the other hand Seaboard Corporation (NYSE:SEB) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks Armstrong World Industries, Inc. (NYSE:AWI) is more popular among hedge funds. Our overall hedge fund sentiment score for AWI is 69.3. 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. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks returned 24% in 2021 through July 9th but still managed to beat the market by 6.7 percentage points. Hedge funds were also right about betting on AWI as the stock returned 21.2% since the end of March (through 7/9) 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.