Is It Time to Invest in American Water Works Company Inc (AWK)?

Hedge funds run by legendary names like Nelson Peltz and David Tepper make billions of dollars a year for themselves and their super-rich accredited investors (you’ve got to have a minimum of $1 million liquid to invest in a hedge fund) by spending enormous resources on analyzing and uncovering data about small-cap stocks that the big brokerage houses don’t follow. Small caps are where they can generate significant out-performance. These stocks have been on a tear since the end of June, outperforming large-cap index funds by more than 10 percentage points. That’s why we pay special attention to hedge fund activity in these stocks.

Is American Water Works Company Inc (NYSE:AWK) worth your attention right now? Investors who are in the know are getting more optimistic. The number of long hedge fund positions increased by 3 recently. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Energy Transfer Equity, L.P. (NYSE:ETE), Incyte Corporation (NASDAQ:INCY), and Rockwell Automation (NYSE:ROK) to gather more data points.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

What have hedge funds been doing with American Water Works Company Inc (NYSE:AWK)?

Heading into the fourth quarter of 2016, a total of 24 of the hedge funds tracked by Insider Monkey were long this stock, a 14% uptick from one quarter earlier, pushing hedge fund ownership of the stock to its highest level in a year. With hedgies’ positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were boosting their stakes considerably (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Ian Simm’s Impax Asset Management has the most valuable position in American Water Works Company Inc (NYSE:AWK), worth close to $83.3 million, accounting for 3.8% of its total 13F portfolio. The second largest stake is held by Osterweis Capital Management, led by John Osterweis, holding a $57.9 million position; the fund has 3.5% of its 13F portfolio invested in the stock. Remaining hedge funds and institutional investors that hold long positions encompass Stuart J. Zimmer’s Zimmer Partners, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital and Cliff Asness’ AQR Capital Management.

As industry-wide interest jumped, specific money managers were breaking ground themselves. Luminus Management, managed by Jonathan Barrett and Paul Segal, created the largest position in American Water Works Company Inc (NYSE:AWK). Luminus Management had $15 million invested in the company at the end of the quarter. John Overdeck and David Siegel’s Two Sigma Advisors also initiated a $6.4 million position during the quarter. The other funds with new positions in the stock are George Hall’s Clinton Group, Ken Griffin’s Citadel Investment Group, and David Costen Haley’s HBK Investments.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as American Water Works Company Inc (NYSE:AWK) but similarly valued. We will take a look at Energy Transfer Equity, L.P. (NYSE:ETE), Incyte Corporation (NASDAQ:INCY), Rockwell Automation (NYSE:ROK), and Essex Property Trust Inc (NYSE:ESS). All of these stocks’ market caps match AWK’s market cap.

As you can see these stocks had an average of 28 hedge funds with bullish positions and the average amount invested in these stocks was $1.18 billion. That figure was $404 million in AWK’s case. Incyte Corporation (NASDAQ:INCY) is the most popular stock in this table. On the other hand Essex Property Trust Inc (NYSE:ESS) is the least popular one with only 19 bullish hedge fund positions. American Water Works Company Inc (NYSE:AWK) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. In this regard INCY might be a better candidate to consider a long position in.

Disclosure: None