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Is American States Water Co (AWR) Going to Burn These Hedge Funds?

“The global economic environment is very favorable for investors. Economies are generally strong, but not too strong. Employment levels are among the strongest for many decades. Interest rates are paused at very low levels, and the risk of significant increases in the medium term seems low. Financing for transactions is freely available to good borrowers, but not in major excess. Covenants are lighter than they were five years ago, but the extreme excesses seen in the past do not seem prevalent yet today. Despite this apparent ‘goldilocks’ market environment, we continue to worry about a world where politics are polarized almost everywhere, interest rates are low globally, and equity valuations are at their peak,” are the words of Brookfield Asset Management. Brookfield was right about politics as stocks experienced their second worst May since the 1960s due to escalation of trade disputes. We pay attention to what hedge funds are doing in a particular stock before considering a potential investment because it works for us. So let’s take a glance at the smart money sentiment towards American States Water Co (NYSE:AWR) and see how it was affected.

Hedge fund interest in American States Water Co (NYSE:AWR) shares was flat at the end of last quarter. This is usually a negative indicator. At the end of this article we will also compare AWR to other stocks including TopBuild Corp (NYSE:BLD), Legg Mason, Inc. (NYSE:LM), and The Timken Company (NYSE:TKR) to get a better sense of its popularity.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

David Harding

David Harding of Winton Capital Management

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. We’re going to check out the fresh hedge fund action regarding American States Water Co (NYSE:AWR).

Hedge fund activity in American States Water Co (NYSE:AWR)

At Q3’s end, a total of 14 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 0% from the previous quarter. On the other hand, there were a total of 12 hedge funds with a bullish position in AWR a year ago. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is AWR A Good Stock To Buy?

The largest stake in American States Water Co (NYSE:AWR) was held by Winton Capital Management, which reported holding $33 million worth of stock at the end of September. It was followed by GLG Partners with a $13.4 million position. Other investors bullish on the company included Renaissance Technologies, Citadel Investment Group, and PEAK6 Capital Management. In terms of the portfolio weights assigned to each position Winton Capital Management allocated the biggest weight to American States Water Co (NYSE:AWR), around 0.39% of its 13F portfolio. PDT Partners is also relatively very bullish on the stock, designating 0.11 percent of its 13F equity portfolio to AWR.

Judging by the fact that American States Water Co (NYSE:AWR) has witnessed a decline in interest from the aggregate hedge fund industry, it’s safe to say that there is a sect of hedgies who were dropping their full holdings in the third quarter. Intriguingly, Paul Tudor Jones’s Tudor Investment Corp sold off the largest investment of the “upper crust” of funds monitored by Insider Monkey, totaling close to $1.1 million in stock. Matthew Hulsizer’s fund, PEAK6 Capital Management, also sold off its stock, about $0.7 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s check out hedge fund activity in other stocks – not necessarily in the same industry as American States Water Co (NYSE:AWR) but similarly valued. We will take a look at TopBuild Corp (NYSE:BLD), Legg Mason, Inc. (NYSE:LM), The Timken Company (NYSE:TKR), and Cedar Fair, L.P. (NYSE:FUN). This group of stocks’ market values are closest to AWR’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
BLD 17 123127 3
LM 25 466189 7
TKR 26 208170 0
FUN 13 99639 5
Average 20.25 224281 3.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.25 hedge funds with bullish positions and the average amount invested in these stocks was $224 million. That figure was $84 million in AWR’s case. The Timken Company (NYSE:TKR) is the most popular stock in this table. On the other hand Cedar Fair, L.P. (NYSE:FUN) is the least popular one with only 13 bullish hedge fund positions. American States Water Co (NYSE:AWR) 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 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately AWR wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); AWR investors were disappointed as the stock returned -4.7% during the first two months of the fourth 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 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.

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

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