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Were Hedge Funds Right About Selling Armstrong World Industries, Inc. (AWI)?

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind let’s see whether Armstrong World Industries, Inc. (NYSE:AWI) represents a good buying opportunity at the moment. Let’s quickly check the hedge fund interest towards the company. Hedge fund firms constantly search out bright intellectuals and highly-experienced employees and throw away millions of dollars on satellite photos and other research activities, so it is no wonder why they tend to generate millions in profits each year. It is also true that some hedge fund players fail inconceivably on some occasions, but net net their stock picks have been generating superior risk-adjusted returns on average over the years.

Armstrong World Industries, Inc. (NYSE:AWI) investors should pay attention to a decrease in enthusiasm from smart money in recent months. AWI was in 24 hedge funds’ portfolios at the end of December. There were 30 hedge funds in our database with AWI positions at the end of the previous quarter. Our calculations also showed that AWI isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by more than 41 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 35.3% through March 3rd. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

William Von Mueffling - Cantillon Capital Management

William Von Mueffling of Cantillon Capital Management

We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s take a look at the key 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 first quarter of 2020, a total of 24 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -20% from the third quarter of 2019. The graph below displays the number of hedge funds with bullish position in AWI over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in Armstrong World Industries, Inc. (NYSE:AWI) was held by Cantillon Capital Management, which reported holding $119.2 million worth of stock at the end of September. It was followed by Renaissance Technologies with a $81.7 million position. Other investors bullish on the company included Gates Capital Management, Melvin Capital Management, and Melvin Capital Management. In terms of the portfolio weights assigned to each position MIG Capital allocated the biggest weight to Armstrong World Industries, Inc. (NYSE:AWI), around 3.94% of its 13F portfolio. Gates Capital Management is also relatively very bullish on the stock, earmarking 3.56 percent of its 13F equity portfolio to AWI.

Due to the fact that Armstrong World Industries, Inc. (NYSE:AWI) has witnessed declining sentiment from the entirety of the hedge funds we track, we can see that there was a specific group of hedgies that decided to sell off their positions entirely last quarter. At the top of the heap, Dmitry Balyasny’s Balyasny Asset Management dropped the biggest investment of the 750 funds tracked by Insider Monkey, comprising close to $10.1 million in call options. D. E. Shaw’s fund, D E Shaw, also said goodbye to its call options, about $2.1 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest dropped by 6 funds last quarter.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Armstrong World Industries, Inc. (NYSE:AWI) but similarly valued. These stocks are YPF Sociedad Anonima (NYSE:YPF), The Boston Beer Company Inc (NYSE:SAM), The Brink’s Company (NYSE:BCO), and PS Business Parks Inc (NYSE:PSB). This group of stocks’ market valuations resemble AWI’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
YPF 15 92848 -5
SAM 26 577456 -4
BCO 24 453999 3
PSB 15 54684 -4
Average 20 294747 -2.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $295 million. That figure was $550 million in AWI’s case. The Boston Beer Company Inc (NYSE:SAM) is the most popular stock in this table. On the other hand YPF Sociedad Anonima (NYSE:YPF) is the least popular one with only 15 bullish hedge fund positions. Armstrong World Industries, Inc. (NYSE:AWI) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th but still beat the market by 5.5 percentage points. Hedge funds were also right about betting on AWI as the stock returned -16.4% during the first quarter (through March 25th) and outperformed the market. Hedge funds were rewarded for their relative bullishness.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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

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