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Hedge Funds Are Selling A. O. Smith Corporation (AOS)

Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors’ consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of A. O. Smith Corporation (NYSE:AOS).

A. O. Smith Corporation (NYSE:AOS) shareholders have witnessed a decrease in enthusiasm from smart money lately. 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Jeff Ubben VALUEACT CAPITAL

Jeffrey Ubben of ValueAct Capital

We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like these. 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. With all of this in mind we’re going to take a gander at the recent hedge fund action surrounding A. O. Smith Corporation (NYSE:AOS).

Hedge fund activity in 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 held long positions in this stock, a change of -4% from the fourth quarter of 2019. The graph below displays the number of hedge funds with bullish position in AOS over the last 18 quarters. With hedge funds’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

Among these funds, Generation Investment Management held the most valuable stake in A. O. Smith Corporation (NYSE:AOS), which was worth $157 million at the end of the third quarter. On the second spot was ValueAct Capital which amassed $79.1 million worth of shares. 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, dishing out 1.54 percent of its 13F equity portfolio to AOS.

Because A. O. Smith Corporation (NYSE:AOS) has faced declining sentiment from the smart money, it’s easy to see that there is a sect of fund managers that decided to sell off their entire stakes last quarter. At the top of the heap, Israel Englander’s Millennium Management said goodbye to the largest position of the “upper crust” of funds tracked by Insider Monkey, comprising an estimated $53.4 million in stock, and Phill Gross and Robert Atchinson’s Adage Capital Management was right behind this move, as the fund dropped about $7.6 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest fell by 1 funds last quarter.

Let’s also examine hedge fund activity in other stocks similar to A. O. Smith Corporation (NYSE:AOS). We will take a look at 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 similar 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 13.9% in 2020 through June 10th but still beat the market by 14.2 percentage points. Hedge funds were also right about betting on AOS as the stock returned 28.7% in Q2 (through June 10th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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