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Hedge Funds Have Never Been This Bullish On A. O. Smith Corporation (AOS)

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 823 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 June 30th, when the S&P 500 Index was trading around the 3100 level. Stocks kept going up since then. In this article we look at how hedge funds traded A. O. Smith Corporation (NYSE:AOS) and determine whether the smart money was really smart about this stock.

Is A. O. Smith Corporation (NYSE:AOS) a safe stock to buy now? The best stock pickers were becoming hopeful. The number of bullish hedge fund positions advanced by 10 lately. A. O. Smith Corporation (NYSE:AOS) was in 35 hedge funds’ portfolios at the end of June. The all time high for this statistics is 33. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that AOS isn’t among the 30 most popular stocks among hedge funds (click for Q2 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 eyes of most traders, hedge funds are viewed as worthless, old investment vehicles of the past. While there are greater than 8000 funds in operation at present, We look at the aristocrats of this group, around 850 funds. Most estimates calculate that this group of people shepherd the majority of all hedge funds’ total capital, and by shadowing their unrivaled picks, Insider Monkey has deciphered a few investment strategies that have historically outperformed Mr. Market. Insider Monkey’s flagship short hedge fund strategy outpaced the S&P 500 short ETFs by around 20 percentage points per annum since its inception in March 2017. Our portfolio of short stocks lost 34% since February 2017 (through August 17th) even though the market was up 53% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Jeff Ubben VALUEACT CAPITAL

Jeffrey Ubben of ValueAct Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock. Legal marijuana is one of the fastest growing industries right now, so we are also checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. 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. Now let’s go over the latest hedge fund action encompassing A. O. Smith Corporation (NYSE:AOS).

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

At second quarter’s end, a total of 35 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 40% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards AOS over the last 20 quarters. With the smart money’s capital changing hands, there exists an “upper tier” of notable hedge fund managers who were adding to their stakes meaningfully (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 $198.1 million at the end of the third quarter. On the second spot was ValueAct Capital which amassed $98.6 million worth of shares. Two Sigma Advisors, D E Shaw, and Millennium Management 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 Generation Investment Management allocated the biggest weight to A. O. Smith Corporation (NYSE:AOS), around 1.14% of its 13F portfolio. ValueAct Capital is also relatively very bullish on the stock, earmarking 1.13 percent of its 13F equity portfolio to AOS.

Now, specific money managers have been driving this bullishness. Millennium Management, managed by Israel Englander, created the most outsized position in A. O. Smith Corporation (NYSE:AOS). Millennium Management had $7.7 million invested in the company at the end of the quarter. Richard SchimeláandáLawrence Sapanski’s Cinctive Capital Management also made a $6 million investment in the stock during the quarter. The following funds were also among the new AOS investors: Paul Marshall and Ian Wace’s Marshall Wace LLP, Greg Eisner’s Engineers Gate Manager, and Michael Gelband’s ExodusPoint Capital.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as A. O. Smith Corporation (NYSE:AOS) but similarly valued. We will take a look at Juniper Networks, Inc. (NYSE:JNPR), ACADIA Pharmaceuticals Inc. (NASDAQ:ACAD), Perrigo Company plc (NYSE:PRGO), GCI Liberty, Inc. (NASDAQ:GLIBA), Snap-on Incorporated (NYSE:SNA), Trex Company, Inc. (NYSE:TREX), and Iron Mountain Incorporated (NYSE:IRM). This group of stocks’ market valuations are similar to AOS’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
JNPR 33 558592 -1
ACAD 44 2839807 16
PRGO 33 446972 5
GLIBA 53 2178205 4
SNA 20 358773 -6
TREX 28 221918 11
IRM 22 64987 3
Average 33.3 952751 4.6

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.3 hedge funds with bullish positions and the average amount invested in these stocks was $953 million. That figure was $410 million in AOS’s case. GCI Liberty, Inc. (NASDAQ:GLIBA) is the most popular stock in this table. On the other hand Snap-on Incorporated (NYSE:SNA) is the least popular one with only 20 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 overall hedge fund sentiment score for AOS is 62.7. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 33% in 2020 through the end of August and beat the market by 23.2 percentage points. Unfortunately AOS wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on AOS were disappointed as the stock returned 4.4% 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.