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Did Hedge Funds Drop The Ball On Armstrong World Industries, Inc. (AWI) ?

World-class money managers like Ken Griffin and Barry Rosenstein only invest their wealthy clients’ money after undertaking a rigorous examination of any potential stock. They are particularly successful in this regard when it comes to small-cap stocks, which their peerless research gives them a big information advantage on when it comes to judging their worth. It’s not surprising then that they generate their biggest returns from these stocks and invest more of their money in these stocks on average than other investors. It’s also not surprising then that we pay close attention to these picks ourselves and have built a market-beating investment strategy around them.

Armstrong World Industries, Inc. (NYSE:AWI) shareholders have witnessed a decrease in hedge fund interest of late. AWI was in 25 hedge funds’ portfolios at the end of the first quarter of 2019. There were 26 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.

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 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 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.

Gabriel Plotkin Melvin Capital Management

We’re going to view the key hedge fund action encompassing Armstrong World Industries, Inc. (NYSE:AWI).

How have hedgies been trading Armstrong World Industries, Inc. (NYSE:AWI)?

At the end of the first quarter, a total of 25 of the hedge funds tracked by Insider Monkey were long this stock, a change of -4% from one quarter earlier. By comparison, 24 hedge funds held shares or bullish call options in AWI a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with AWI Positions

More specifically, Gates Capital Management was the largest shareholder of Armstrong World Industries, Inc. (NYSE:AWI), with a stake worth $118.4 million reported as of the end of March. Trailing Gates Capital Management was Cantillon Capital Management, which amassed a stake valued at $106.1 million. AQR Capital Management, D E Shaw, and Melvin Capital Management were also very fond of the stock, giving the stock large weights in their portfolios.

Due to the fact that Armstrong World Industries, Inc. (NYSE:AWI) has faced falling interest from the entirety of the hedge funds we track, it’s easy to see that there exists a select few hedgies who sold off their full holdings in the third quarter. It’s worth mentioning that Benjamin A. Smith’s Laurion Capital Management sold off the biggest stake of the 700 funds tracked by Insider Monkey, comprising about $13.3 million in stock, and Phill Gross and Robert Atchinson’s Adage Capital Management was right behind this move, as the fund dumped about $11.6 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest dropped by 1 funds in the third quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Armstrong World Industries, Inc. (NYSE:AWI). These stocks are Grupo Financiero Galicia S.A. (NASDAQ:GGAL), American Eagle Outfitters Inc. (NYSE:AEO), Wyndham Destinations, Inc. (NYSE:WYND), and ACI Worldwide Inc (NASDAQ:ACIW). This group of stocks’ market caps are similar to AWI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
GGAL 17 114741 -2
AEO 25 459761 -2
WYND 25 139648 5
ACIW 23 347597 2
Average 22.5 265437 0.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 22.5 hedge funds with bullish positions and the average amount invested in these stocks was $265 million. That figure was $522 million in AWI’s case. American Eagle Outfitters Inc. (NYSE:AEO) is the most popular stock in this table. On the other hand Grupo Financiero Galicia S.A. (NASDAQ:GGAL) is the least popular one with only 17 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. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. Hedge funds were also right about betting on AWI as the stock returned 12.4% during the same period and outperformed the market by an even larger margin. Hedge funds were rewarded for their relative bullishness.

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

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