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Is Armstrong World Industries, Inc. (AWI) A Good Stock To Buy?

It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Index returned approximately 13.1% in the first 2.5 months of this year (including dividend payments). Conversely, hedge funds’ top 15 large-cap stock picks generated a return of 19.7% during the same 2.5-month period, with 93% of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds’ stock picks generate superior risk-adjusted returns. That’s why we believe it isn’t a waste of time to check out hedge fund sentiment before you invest in a stock like Armstrong World Industries, Inc. (NYSE:AWI).

Armstrong World Industries, Inc. (NYSE:AWI) shareholders have witnessed an increase in support from the world’s most elite money managers in recent months. Our calculations also showed that AWI isn’t among the 30 most popular stocks among hedge funds.

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 market by 32 percentage points since May 2014 through March 12, 2019 (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.

Jeffrey Gates Gates Capital

Let’s review the recent hedge fund action encompassing Armstrong World Industries, Inc. (NYSE:AWI).

How are hedge funds trading Armstrong World Industries, Inc. (NYSE:AWI)?

Heading into the first quarter of 2019, a total of 26 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 18% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in AWI over the last 14 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

AWI_apr2019

Among these funds, ValueAct Capital held the most valuable stake in Armstrong World Industries, Inc. (NYSE:AWI), which was worth $130.7 million at the end of the third quarter. On the second spot was Gates Capital Management which amassed $97 million worth of shares. Moreover, Cantillon Capital Management, AQR Capital Management, and Millennium Management were also bullish on Armstrong World Industries, Inc. (NYSE:AWI), allocating a large percentage of their portfolios to this stock.

Now, key money managers were breaking ground themselves. Adage Capital Management, managed by Phill Gross and Robert Atchinson, initiated the largest position in Armstrong World Industries, Inc. (NYSE:AWI). Adage Capital Management had $11.6 million invested in the company at the end of the quarter. David Costen Haley’s HBK Investments also initiated a $5.3 million position during the quarter. The other funds with brand new AWI positions are Sander Gerber’s Hudson Bay Capital Management, Matthew Hulsizer’s PEAK6 Capital Management, and Matthew Tewksbury’s Stevens Capital Management.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as Armstrong World Industries, Inc. (NYSE:AWI) but similarly valued. We will take a look at Ligand Pharmaceuticals Inc. (NASDAQ:LGND), 2U Inc (NASDAQ:TWOU), RLJ Lodging Trust (NYSE:RLJ), and The Timken Company (NYSE:TKR). All of these stocks’ market caps are similar to AWI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
LGND 24 532704 -4
TWOU 11 106758 -3
RLJ 25 220103 5
TKR 25 178477 -4
Average 21.25 259511 -1.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.25 hedge funds with bullish positions and the average amount invested in these stocks was $260 million. That figure was $520 million in AWI’s case. RLJ Lodging Trust (NYSE:RLJ) is the most popular stock in this table. On the other hand 2U Inc (NASDAQ:TWOU) is the least popular one with only 11 bullish hedge fund positions. Compared to these stocks Armstrong World Industries, Inc. (NYSE:AWI) is more popular among hedge funds. Our calculations showed that top 15 most popular stocks) among hedge funds returned 24.2% through April 22nd and outperformed the S&P 500 ETF (SPY) by more than 7 percentage points. Hedge funds were also right about betting on AWI as the stock returned 49.6% and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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

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