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Were Hedge Funds Right About Souring On American Water Works Company (AWK)?

Asma UL Husna

Is American Water Works Company, Inc. (NYSE:AWK) a good bet right now? We like to analyze hedge fund sentiment before conducting days of in-depth research. We do so because hedge funds and other elite investors have numerous Ivy League graduates, expert network advisers, and supply chain tipsters working or consulting for them. There is not a shortage of news stories covering failed hedge fund investments and it is a fact that hedge funds' picks don't beat the market 100% of the time, but their consensus picks have historically done very well and have outperformed the market after adjusting for risk.

American Water Works Company, Inc. (NYSE:AWK) has experienced a decrease in enthusiasm from smart money in recent months. Our calculations also showed that AWK 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.

5 Most Popular Stocks Among Hedge Funds

Today there are many formulas investors employ to grade stocks. A pair of the most useful formulas are hedge fund and insider trading sentiment. Our researchers have shown that, historically, those who follow the best picks of the best fund managers can outpace the market by a superb margin (see the details here).

AWK_oct2019

Unlike some fund managers who are betting on Dow reaching 40000 in a year, 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 review the fresh hedge fund action regarding American Water Works Company, Inc. (NYSE:AWK).

How have hedgies been trading American Water Works Company, Inc. (NYSE:AWK)?

Heading into the third quarter of 2019, a total of 23 of the hedge funds tracked by Insider Monkey were long this stock, a change of -18% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards AWK over the last 16 quarters. So, let's find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

[caption id="attachment_728376" align="aligncenter" width="473"] Jonathan Barrett of Luminus Management[/caption]

Jonathan Barrett Luminus Management

The largest stake in American Water Works Company, Inc. (NYSE:AWK) was held by Impax Asset Management, which reported holding $254.4 million worth of stock at the end of March. It was followed by AQR Capital Management with a $87.1 million position. Other investors bullish on the company included Zimmer Partners, Luminus Management, and Osterweis Capital Management.

Due to the fact that American Water Works Company, Inc. (NYSE:AWK) has faced declining sentiment from the smart money, it's safe to say that there is a sect of hedgies that decided to sell off their entire stakes by the end of the second quarter. Interestingly, Phill Gross and Robert Atchinson's Adage Capital Management cut the largest investment of the 750 funds monitored by Insider Monkey, comprising an estimated $22.9 million in stock. Peter Rathjens, Bruce Clarke and John Campbell's fund, Arrowstreet Capital, also dumped its stock, about $17.3 million worth. These bearish behaviors are interesting, as total hedge fund interest was cut 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 American Water Works Company, Inc. (NYSE:AWK). These stocks are State Street Corporation (NYSE:STT), Cadence Design Systems Inc (NASDAQ:CDNS), AMETEK, Inc. (NYSE:AME), and MSCI Inc (NYSE:MSCI). This group of stocks' market caps resemble AWK's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position STT,36,794984,4 CDNS,28,1688088,-3 AME,31,1065031,2 MSCI,36,774691,0 Average,32.75,1080699,0.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 32.75 hedge funds with bullish positions and the average amount invested in these stocks was $1081 million. That figure was $494 million in AWK's case. State Street Corporation (NYSE:STT) is the most popular stock in this table. On the other hand Cadence Design Systems Inc (NASDAQ:CDNS) is the least popular one with only 28 bullish hedge fund positions. Compared to these stocks American Water Works Company, Inc. (NYSE:AWK) is even less popular than CDNS. Hedge funds clearly dropped the ball on AWK as the stock delivered strong returns, though hedge funds' consensus picks still generated respectable returns. 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. A small number of hedge funds were also right about betting on AWK as the stock returned 7.5% during the third quarter and outperformed the market by an even larger margin.

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

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