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Were These Hedge Funds Wrong About Loading Up On Armstrong World Industries, Inc. (AWI)?

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In this article we will take a look at whether hedge funds think Armstrong World Industries, Inc. (NYSE:AWI) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

Is Armstrong World Industries, Inc. (NYSE:AWI) a buy here? The smart money was in a bullish mood. The number of bullish hedge fund bets improved by 14 recently. Armstrong World Industries, Inc. (NYSE:AWI) was in 34 hedge funds' portfolios at the end of June. The all time high for this statistics is 37. Our calculations also showed that AWI isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: 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' 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 58 percentage points since March 2017 (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.

Michael Gelband of ExodusPoint Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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 website to get excerpts of these letters in your inbox. Now we're going to analyze the key hedge fund action encompassing Armstrong World Industries, Inc. (NYSE:AWI).

What have hedge funds been doing with Armstrong World Industries, Inc. (NYSE:AWI)?

At second quarter's end, a total of 34 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 70% from one quarter earlier. On the other hand, there were a total of 30 hedge funds with a bullish position in AWI a year ago. With hedgies' sentiment swirling, there exists a select group of noteworthy hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

The largest stake in Armstrong World Industries, Inc. (NYSE:AWI) was held by Cantillon Capital Management, which reported holding $99.9 million worth of stock at the end of June. It was followed by Gates Capital Management with a $95.5 million position. Other investors bullish on the company included MIG Capital, Millennium Management, and Renaissance Technologies. In terms of the portfolio weights assigned to each position Gates Capital Management allocated the biggest weight to Armstrong World Industries, Inc. (NYSE:AWI), around 4.78% of its 13F portfolio. MIG Capital is also relatively very bullish on the stock, setting aside 4.18 percent of its 13F equity portfolio to AWI.

As industrywide interest jumped, some big names were leading the bulls' herd. Millennium Management, managed by Israel Englander, initiated the most outsized position in Armstrong World Industries, Inc. (NYSE:AWI). Millennium Management had $33.4 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital also made a $18.4 million investment in the stock during the quarter. The other funds with new positions in the stock are Phill Gross and Robert Atchinson's Adage Capital Management, Michael Gelband's ExodusPoint Capital, and Dmitry Balyasny's Balyasny Asset Management.

Let's go over hedge fund activity in other stocks similar to Armstrong World Industries, Inc. (NYSE:AWI). We will take a look at Western Alliance Bancorporation (NYSE:WAL), GW Pharmaceuticals plc (NASDAQ:GWPH), National Fuel Gas Company (NYSE:NFG), Hutchison China MediTech Limited (NASDAQ:HCM), Southwest Gas Holdings, Inc. (NYSE:SWX), Houlihan Lokey Inc (NYSE:HLI), and Brixmor Property Group Inc (NYSE:BRX). This group of stocks' market valuations are similar to AWI's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WAL,24,139929,-3 GWPH,18,350605,-3 NFG,22,174710,4 HCM,7,34538,1 SWX,13,83518,0 HLI,24,146572,9 BRX,24,82889,-4 Average,18.9,144680,0.6 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.9 hedge funds with bullish positions and the average amount invested in these stocks was $145 million. That figure was $372 million in AWI's case. Western Alliance Bancorporation (NYSE:WAL) is the most popular stock in this table. On the other hand Hutchison China MediTech Limited (NASDAQ:HCM) is the least popular one with only 7 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 87.6. 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 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. Unfortunately AWI wasn't nearly as popular as these 10 stocks and hedge funds that were betting on AWI were disappointed as the stock returned -22.9% since the end of the second quarter (through 10/30) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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

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