A. O. Smith Corporation (NYSE:AOS) investors should pay attention to a decrease in hedge fund sentiment of late.
If you'd ask most traders, hedge funds are seen as slow, outdated financial vehicles of the past. While there are greater than 8000 funds trading at present, we choose to focus on the bigwigs of this group, around 450 funds. It is widely believed that this group controls the majority of the hedge fund industry's total capital, and by paying attention to their best equity investments, we have figured out a number of investment strategies that have historically outperformed the broader indices. Our small-cap hedge fund strategy outperformed the S&P 500 index by 18 percentage points per year for a decade in our back tests, and since we've started sharing our picks with our subscribers at the end of August 2012, we have topped the S&P 500 index by 24 percentage points in 7 months (see all of our picks from August).
Just as integral, positive insider trading sentiment is a second way to parse down the marketplace. There are many motivations for an upper level exec to drop shares of his or her company, but just one, very clear reason why they would initiate a purchase. Several academic studies have demonstrated the market-beating potential of this strategy if "monkeys" understand what to do (learn more here).
Consequently, it's important to take a look at the recent action surrounding A. O. Smith Corporation (NYSE:AOS).
In preparation for this year, a total of 9 of the hedge funds we track were bullish in this stock, a change of -36% from one quarter earlier. With hedgies' capital changing hands, there exists a select group of key hedge fund managers who were upping their holdings significantly.
When looking at the hedgies we track, Donald Chiboucis's Columbus Circle Investors had the biggest position in A. O. Smith Corporation (NYSE:AOS), worth close to $40 million, comprising 0.3% of its total 13F portfolio. Sitting at the No. 2 spot is Chuck Royce of Royce & Associates, with a $31 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Other peers that hold long positions include Cliff Asness's AQR Capital Management, Andrew Sandler's Sandler Capital Management and Israel Englander's Millennium Management.
Because A. O. Smith Corporation (NYSE:AOS) has witnessed falling interest from hedge fund managers, it's easy to see that there exists a select few hedge funds who sold off their positions entirely at the end of the year. Interestingly, Phill Gross and Robert Atchinson's Adage Capital Management said goodbye to the biggest investment of the "upper crust" of funds we monitor, valued at an estimated $19 million in stock.. David Costen Haley's fund, HBK Investments, also said goodbye to its stock, about $6 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest dropped by 5 funds at the end of the year.
Bullish insider trading is best served when the company we're looking at has seen transactions within the past half-year. Over the last 180-day time period, A. O. Smith Corporation (NYSE:AOS) has experienced zero unique insiders purchasing, and 13 insider sales (see the details of insider trades here).
Let's also review hedge fund and insider activity in other stocks similar to A. O. Smith Corporation (NYSE:AOS). These stocks are General Cable Corporation (NYSE:BGC), EnerSys (NYSE:ENS), Belden Inc. (NYSE:BDC), Woodward Inc (NASDAQ:WWD), and REGAL-BELOIT CORPORATION (NYSE:RBC). This group of stocks are the members of the industrial electrical equipment industry and their market caps are similar to AOS's market cap.