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Did Hedge Funds Make The Right Call On AZZ Incorporated (AZZ) ?

The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at 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. 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 we look at how hedge funds traded AZZ Incorporated (NYSE:AZZ) and determine whether the smart money was really smart about this stock.

AZZ Incorporated (NYSE:AZZ) has seen an increase in activity from the world’s largest hedge funds in recent months. Our calculations also showed that AZZ 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.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

GOTHAM ASSET MANAGEMENT

Joel Greenblatt of Gotham Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. With Federal Reserve creating trillions of dollars out of thin air, we believe gold prices will keep increasing. So, we are checking out gold stocks like this small gold mining company. We go through lists like the 10 most profitable companies in America 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind we’re going to take a look at the new hedge fund action encompassing AZZ Incorporated (NYSE:AZZ).

How have hedgies been trading AZZ Incorporated (NYSE:AZZ)?

At Q1’s end, a total of 17 of the hedge funds tracked by Insider Monkey were long this stock, a change of 6% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in AZZ over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to Insider Monkey’s hedge fund database, Mario Gabelli’s GAMCO Investors has the most valuable position in AZZ Incorporated (NYSE:AZZ), worth close to $6.6 million, corresponding to 0.1% of its total 13F portfolio. Coming in second is Citadel Investment Group, led by Ken Griffin, holding a $4.7 million position; the fund has less than 0.1%% of its 13F portfolio invested in the stock. Some other peers that are bullish consist of Peter Schliemann’s Rutabaga Capital Management, D. E. Shaw’s D E Shaw and Israel Englander’s Millennium Management. In terms of the portfolio weights assigned to each position Rutabaga Capital Management allocated the biggest weight to AZZ Incorporated (NYSE:AZZ), around 2.69% of its 13F portfolio. Algert Coldiron Investors is also relatively very bullish on the stock, setting aside 0.34 percent of its 13F equity portfolio to AZZ.

As one would reasonably expect, key hedge funds were leading the bulls’ herd. Algert Coldiron Investors, managed by Peter Algert and Kevin Coldiron, assembled the most outsized position in AZZ Incorporated (NYSE:AZZ). Algert Coldiron Investors had $0.8 million invested in the company at the end of the quarter. Mike Vranos’s Ellington also made a $0.3 million investment in the stock during the quarter. The following funds were also among the new AZZ investors: Joel Greenblatt’s Gotham Asset Management, Peter Muller’s PDT Partners, and Chuck Royce’s Royce & Associates.

Let’s check out hedge fund activity in other stocks similar to AZZ Incorporated (NYSE:AZZ). These stocks are Medifast, Inc. (NYSE:MED), Pampa Energia S.A. (NYSE:PAM), Benchmark Electronics, Inc. (NYSE:BHE), and Upwork Inc. (NASDAQ:UPWK). This group of stocks’ market values are closest to AZZ’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MED 16 217606 -3
PAM 7 36956 -3
BHE 14 24868 -5
UPWK 22 107524 -2
Average 14.75 96739 -3.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 14.75 hedge funds with bullish positions and the average amount invested in these stocks was $97 million. That figure was $31 million in AZZ’s case. Upwork Inc. (NASDAQ:UPWK) is the most popular stock in this table. On the other hand Pampa Energia S.A. (NYSE:PAM) is the least popular one with only 7 bullish hedge fund positions. AZZ Incorporated (NYSE:AZZ) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. 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 18.6% in 2020 through July 27th but beat the market by 17.1 percentage points. Unfortunately AZZ wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on AZZ were disappointed as the stock returned 13.5% during the same time period 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 many of these stocks already outperformed the market so far this year.

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