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Did Hedge Funds Make The Right Call On A. O. Smith Corporation (AOS) ?

The latest 13F reporting period has come and gone, and Insider Monkey have plowed through 821 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds’ and investors’ portfolio positions as of March 31st, a week after the market trough. Now, we are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article you are going to find out whether hedge funds thought A. O. Smith Corporation (NYSE:AOS) was a good investment heading into the second quarter and how the stock traded in comparison to the top hedge fund picks.

A. O. Smith Corporation (NYSE:AOS) has experienced a decrease in support from the world’s most elite money managers of late. AOS was in 25 hedge funds’ portfolios at the end of the first quarter of 2020. There were 26 hedge funds in our database with AOS positions at the end of the previous quarter. Our calculations also showed that AOS isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

At the moment there are several tools stock traders use to analyze stocks. A pair of the most useful tools are hedge fund and insider trading indicators. Our researchers have shown that, historically, those who follow the best picks of the elite fund managers can outpace the broader indices by a solid amount (see the details here).

David Blood

David Blood of Generation Investment Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. 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. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so if you have any good ideas send us an email. With all of this in mind let’s take a glance at the fresh hedge fund action encompassing A. O. Smith Corporation (NYSE:AOS).

What have hedge funds been doing with A. O. Smith Corporation (NYSE:AOS)?

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 the previous quarter. The graph below displays the number of hedge funds with bullish position in AOS over the last 18 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

More specifically, Generation Investment Management was the largest shareholder of A. O. Smith Corporation (NYSE:AOS), with a stake worth $157 million reported as of the end of September. Trailing Generation Investment Management was ValueAct Capital, which amassed a stake valued at $79.1 million. Two Sigma Advisors, Impax Asset Management, and ZWEIG DIMENNA PARTNERS were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Sandbar Asset Management allocated the biggest weight to A. O. Smith Corporation (NYSE:AOS), around 1.79% of its 13F portfolio. ZWEIG DIMENNA PARTNERS is also relatively very bullish on the stock, earmarking 1.54 percent of its 13F equity portfolio to AOS.

Since A. O. Smith Corporation (NYSE:AOS) has faced falling interest from the entirety of the hedge funds we track, it’s safe to say that there exists a select few fund managers who were dropping their entire stakes in the first quarter. At the top of the heap, Israel Englander’s Millennium Management sold off the largest investment of the “upper crust” of funds followed by Insider Monkey, comprising about $53.4 million in stock. Phill Gross and Robert Atchinson’s fund, Adage Capital Management, also cut its stock, about $7.6 million worth. These transactions are intriguing to say the least, as total hedge fund interest dropped by 1 funds in the first quarter.

Let’s also examine hedge fund activity in other stocks similar to A. O. Smith Corporation (NYSE:AOS). These stocks are Ciena Corporation (NYSE:CIEN), Reynolds Consumer Products Inc. (NASDAQ:REYN), Textron Inc. (NYSE:TXT), and Watsco Inc (NYSE:WSO). All of these stocks’ market caps are closest to AOS’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
CIEN 31 301426 -4
REYN 17 267945 17
TXT 22 230265 -8
WSO 20 173809 -3
Average 22.5 243361 0.5

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 $243 million. That figure was $364 million in AOS’s case. Ciena Corporation (NYSE:CIEN) is the most popular stock in this table. On the other hand Reynolds Consumer Products Inc. (NASDAQ:REYN) is the least popular one with only 17 bullish hedge fund positions. A. O. Smith Corporation (NYSE:AOS) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on AOS, though not to the same extent, as the stock returned 25.3% during the second quarter and outperformed the market as well.

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