How do we determine whether A. O. Smith Corporation (NYSE:AOS) makes for a good investment at the moment? We analyze the sentiment of a select group of the very best investors in the world, who spend immense amounts of time and resources studying companies. They may not always be right (no one is), but data shows that their consensus long positions have historically outperformed the market when we adjust for known risk factors.
A. O. Smith Corporation (NYSE:AOS) was in 22 hedge funds' portfolios at the end of the second quarter of 2019. AOS investors should be aware of a decrease in hedge fund sentiment of late. There were 27 hedge funds in our database with AOS holdings at the end of the previous quarter. Our calculations also showed that AOS isn't among the 30 most popular stocks among hedge funds (see the video below). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were 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'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 25.7% through September 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.
Unlike this former hedge fund manager who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's take a look at the recent hedge fund action encompassing A. O. Smith Corporation (NYSE:AOS).
What have hedge funds been doing with A. O. Smith Corporation (NYSE:AOS)?
At the end of the second quarter, a total of 22 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 21 hedge funds with a bullish position in AOS a year ago. With the smart money's positions undergoing their usual ebb and flow, there exists a few key hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).
The largest stake in A. O. Smith Corporation (NYSE:AOS) was held by Impax Asset Management, which reported holding $180.1 million worth of stock at the end of March. It was followed by Viking Global with a $115.6 million position. Other investors bullish on the company included Point72 Asset Management, Two Sigma Advisors, and Balyasny Asset Management.
Seeing as A. O. Smith Corporation (NYSE:AOS) has faced bearish sentiment from the smart money, we can see that there exists a select few money managers that decided to sell off their positions entirely by the end of the second quarter. It's worth mentioning that Brian Gustavson and Andrew Haley's 1060 Capital Management dumped the largest position of the "upper crust" of funds watched by Insider Monkey, comprising an estimated $11.1 million in stock, and Chuck Royce's Royce & Associates was right behind this move, as the fund sold off about $9.1 million worth. These moves are interesting, as total hedge fund interest dropped by 5 funds by the end of the second quarter.
Let's now take a look at hedge fund activity in other stocks similar to A. O. Smith Corporation (NYSE:AOS). We will take a look at Sociedad Quimica y Minera de Chile S.A. (NYSE:SQM), Cognex Corporation (NASDAQ:CGNX), Sensata Technologies Holding plc (NYSE:ST), and AptarGroup, Inc. (NYSE:ATR). This group of stocks' market values are closest to AOS's market value.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position SQM,7,23441,-2 CGNX,13,272646,0 ST,21,1181343,0 ATR,20,95998,5 Average,15.25,393357,0.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 15.25 hedge funds with bullish positions and the average amount invested in these stocks was $393 million. That figure was $512 million in AOS's case. Sensata Technologies Holding plc (NYSE:ST) is the most popular stock in this table. On the other hand Sociedad Quimica y Minera de Chile S.A. (NYSE:SQM) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks A. O. Smith Corporation (NYSE:AOS) is more popular among hedge funds. 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 AOS wasn't nearly as popular as these 20 stocks and hedge funds that were betting on AOS were disappointed as the stock returned 1.7% 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 in Q3.
Disclosure: None. This article was originally published at Insider Monkey.