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Hedge Funds Are Getting Out Of Armstrong World Industries, Inc. (AWI)

In this article you are going to find out whether hedge funds think Armstrong World Industries, Inc. (NYSE:AWI) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.

Armstrong World Industries, Inc. (NYSE:AWI) investors should pay attention to a decrease in hedge fund interest in recent months. AWI was in 20 hedge funds’ portfolios at the end of the first quarter of 2020. There were 24 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 (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.

Jeffrey Gates Gates Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, 2020’s unprecedented market conditions provide us with the highest number of trading opportunities in a decade. So we are checking out trades like this one. We interview hedge fund managers and ask them about their best ideas. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to take a glance at the key hedge fund action surrounding Armstrong World Industries, Inc. (NYSE:AWI).

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

At Q1’s end, a total of 20 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -17% from one quarter earlier. By comparison, 25 hedge funds held shares or bullish call options in AWI a year ago. With hedgies’ capital changing hands, there exists a select group of notable hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).

Is AWI A Good Stock To Buy?

Among these funds, Cantillon Capital Management held the most valuable stake in Armstrong World Industries, Inc. (NYSE:AWI), which was worth $100.6 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $56.5 million worth of shares. Gates Capital Management, MIG Capital, and Citadel Investment Group 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 MIG Capital allocated the biggest weight to Armstrong World Industries, Inc. (NYSE:AWI), around 4.46% of its 13F portfolio. Gates Capital Management is also relatively very bullish on the stock, designating 3.25 percent of its 13F equity portfolio to AWI.

Seeing as Armstrong World Industries, Inc. (NYSE:AWI) has experienced declining sentiment from hedge fund managers, it’s safe to say that there exists a select few money managers that elected to cut their entire stakes last quarter. Interestingly, Gabriel Plotkin’s Melvin Capital Management sold off the largest stake of all the hedgies followed by Insider Monkey, comprising about $79.4 million in stock, and Clint Carlson’s Carlson Capital was right behind this move, as the fund cut about $13.9 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 4 funds last quarter.

Let’s also examine hedge fund activity in other stocks similar to Armstrong World Industries, Inc. (NYSE:AWI). We will take a look at First Solar, Inc. (NASDAQ:FSLR), Landstar System, Inc. (NASDAQ:LSTR), Spire Inc. (NYSE:SR), and National Oilwell Varco, Inc. (NYSE:NOV). This group of stocks’ market values are closest to AWI’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
FSLR 22 150839 -2
LSTR 22 156653 -2
SR 13 40465 1
NOV 29 476345 -2
Average 21.5 206076 -1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.5 hedge funds with bullish positions and the average amount invested in these stocks was $206 million. That figure was $323 million in AWI’s case. National Oilwell Varco, Inc. (NYSE:NOV) is the most popular stock in this table. On the other hand Spire Inc. (NYSE:SR) is the least popular one with only 13 bullish hedge fund positions. Armstrong World Industries, Inc. (NYSE:AWI) 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. 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 12.2% in 2020 through June 17th and surpassed the market by 14.8 percentage points. Unfortunately AWI wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); AWI investors were disappointed as the stock returned -2.5% during the second quarter 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 most of these stocks already outperformed the market in 2020.

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