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Should I Buy Armstrong World Industries, Inc. (AWI)?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards Armstrong World Industries, Inc. (NYSE:AWI) and determine whether hedge funds skillfully traded this stock.

Is Armstrong World Industries, Inc. (NYSE:AWI) ready to rally soon? Hedge funds were in a bullish mood. The number of bullish hedge fund bets went up by 14 lately. Armstrong World Industries, Inc. (NYSE:AWI) was in 34 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 37. Our calculations also showed that AWI 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.

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 was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 56 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 34% through August 17th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Jeffrey Gates of Gates Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, this “mom” trader turned $2000 into $2 million within 2 years. So, we are checking out her best trade idea of the month. Cannabis stocks are roaring back in 2020, which is why we are also checking out this under-the-radar stock. 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 check out the new hedge fund action encompassing Armstrong World Industries, Inc. (NYSE:AWI).

What does smart money think about Armstrong World Industries, Inc. (NYSE:AWI)?

Heading into the third quarter of 2020, a total of 34 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 70% from the first quarter of 2020. The graph below displays the number of hedge funds with bullish position in AWI over the last 20 quarters. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).

When looking at the institutional investors followed by Insider Monkey, Cantillon Capital Management, managed by William von Mueffling, holds the biggest position in Armstrong World Industries, Inc. (NYSE:AWI). Cantillon Capital Management has a $99.9 million position in the stock, comprising 0.9% of its 13F portfolio. Sitting at the No. 2 spot is Gates Capital Management, managed by Jeffrey Gates, which holds a $95.5 million position; 4.8% of its 13F portfolio is allocated to the company. Remaining professional money managers with similar optimism encompass Richard Merage’s MIG Capital, Israel Englander’s Millennium Management and Renaissance Technologies. In terms of the portfolio weights assigned to each position Gates Capital Management allocated the biggest weight to Armstrong World Industries, Inc. (NYSE:AWI), around 4.78% of its 13F portfolio. MIG Capital is also relatively very bullish on the stock, setting aside 4.18 percent of its 13F equity portfolio to AWI.

Now, some big names have been driving this bullishness. Millennium Management, managed by Israel Englander, assembled the most outsized position in Armstrong World Industries, Inc. (NYSE:AWI). Millennium Management had $33.4 million invested in the company at the end of the quarter. Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital also initiated a $18.4 million position during the quarter. The other funds with brand new AWI positions are Phill Gross and Robert Atchinson’s Adage Capital Management, Michael Gelband’s ExodusPoint Capital, and Dmitry Balyasny’s Balyasny Asset Management.

Let’s also examine hedge fund activity in other stocks similar to Armstrong World Industries, Inc. (NYSE:AWI). We will take a look at Western Alliance Bancorporation (NYSE:WAL), GW Pharmaceuticals plc (NASDAQ:GWPH), National Fuel Gas Company (NYSE:NFG), Hutchison China MediTech Limited (NASDAQ:HCM), Southwest Gas Holdings, Inc. (NYSE:SWX), Houlihan Lokey Inc (NYSE:HLI), and Brixmor Property Group Inc (NYSE:BRX). All of these stocks’ market caps resemble AWI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
WAL 24 139929 -3
GWPH 18 350605 -3
NFG 22 174710 4
HCM 7 34538 1
SWX 13 83518 0
HLI 24 146572 9
BRX 24 82889 -4
Average 18.9 144680 0.6

View table here if you experience formatting issues.

As you can see these stocks had an average of 18.9 hedge funds with bullish positions and the average amount invested in these stocks was $145 million. That figure was $372 million in AWI’s case. Western Alliance Bancorporation (NYSE:WAL) is the most popular stock in this table. On the other hand Hutchison China MediTech Limited (NASDAQ:HCM) is the least popular one with only 7 bullish hedge fund positions. Compared to these stocks Armstrong World Industries, Inc. (NYSE:AWI) is more popular among hedge funds. Our overall hedge fund sentiment score for AWI is 87.6. 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. 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 still beat the market by 23.2 percentage points. Unfortunately AWI wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on AWI were disappointed as the stock returned -5.1% since the end of 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.