It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Index returned approximately 20% in the first 9 months of this year (through September 30th). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 24% during the same 9-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Armstrong World Industries, Inc. (NYSE:AWI).
Armstrong World Industries, Inc. (NYSE:AWI) was in 30 hedge funds' portfolios at the end of June. AWI investors should be aware of an increase in support from the world's most elite money managers lately. There were 25 hedge funds in our database with AWI positions at the end of the previous quarter. Our calculations also showed that AWI 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.
Why do we pay any attention at all to hedge fund sentiment? 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 former hedge manager, Dr. Steve Sjuggerud, 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. We're going to analyze the new hedge fund action surrounding Armstrong World Industries, Inc. (NYSE:AWI).
How have hedgies been trading Armstrong World Industries, Inc. (NYSE:AWI)?
Heading into the third quarter of 2019, a total of 30 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 20% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards AWI over the last 16 quarters. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
Of the funds tracked by Insider Monkey, Cantillon Capital Management, managed by William von Mueffling, holds the most valuable position in Armstrong World Industries, Inc. (NYSE:AWI). Cantillon Capital Management has a $127 million position in the stock, comprising 1.3% of its 13F portfolio. On Cantillon Capital Management's heels is Gates Capital Management, led by Jeffrey Gates, holding a $82.6 million position; the fund has 3.5% of its 13F portfolio invested in the stock. Other professional money managers that are bullish consist of Cliff Asness's AQR Capital Management, D. E. Shaw's D E Shaw and Renaissance Technologies.
Now, key hedge funds have jumped into Armstrong World Industries, Inc. (NYSE:AWI) headfirst. Carlson Capital, managed by Clint Carlson, created the largest position in Armstrong World Industries, Inc. (NYSE:AWI). Carlson Capital had $17.8 million invested in the company at the end of the quarter. Steve Cohen's Point72 Asset Management also made a $9.8 million investment in the stock during the quarter. The other funds with brand new AWI positions are Richard Driehaus's Driehaus Capital, Minhua Zhang's Weld Capital Management, and Paul Tudor Jones's Tudor Investment Corp.
Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Armstrong World Industries, Inc. (NYSE:AWI) but similarly valued. These stocks are Cyberark Software Ltd (NASDAQ:CYBR), ONE Gas Inc (NYSE:OGS), The Stars Group Inc. (NASDAQ:TSG), and Teladoc Health Inc (NYSE:TDOC). This group of stocks' market caps resemble AWI's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CYBR,19,308110,-9 OGS,14,93848,-1 TSG,38,877092,-6 TDOC,18,172338,1 Average,22.25,362847,-3.75 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 22.25 hedge funds with bullish positions and the average amount invested in these stocks was $363 million. That figure was $531 million in AWI's case. The Stars Group Inc. (NASDAQ:TSG) is the most popular stock in this table. On the other hand ONE Gas Inc (NYSE:OGS) is the least popular one with only 14 bullish hedge fund positions. Armstrong World Industries, Inc. (NYSE:AWI) is not the most popular stock in this group but hedge fund interest is still above average. 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 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Unfortunately AWI wasn't nearly as popular as these 20 stocks and hedge funds that were betting on AWI were disappointed as the stock returned -0.3% 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 so far this year.
Disclosure: None. This article was originally published at Insider Monkey.