Were Hedge Funds Right About Souring On 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) a healthy stock for your portfolio? Money managers were taking a bearish view. The number of long hedge fund positions decreased by 4 recently. Our calculations also showed that AWI isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks). AWI was in 20 hedge funds’ portfolios at the end of the first quarter of 2020. There were 24 hedge funds in our database with AWI positions at the end of the previous quarter.

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 58 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 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. 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. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. With all of this in mind we’re going to analyze the latest hedge fund action regarding Armstrong World Industries, Inc. (NYSE:AWI).

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

Heading into the second quarter of 2020, a total of 20 of the hedge funds tracked by Insider Monkey were long this stock, a change of -17% from the previous quarter. By comparison, 25 hedge funds held shares or bullish call options in AWI a year ago. With hedge funds’ positions undergoing their usual ebb and flow, there exists a select group of key hedge fund managers who were adding to their holdings substantially (or already accumulated large positions).

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, William von Mueffling’s Cantillon Capital Management has the most valuable position in Armstrong World Industries, Inc. (NYSE:AWI), worth close to $100.6 million, accounting for 1.1% of its total 13F portfolio. Sitting at the No. 2 spot is Renaissance Technologies, which holds a $56.5 million position; the fund has 0.1% of its 13F portfolio invested in the stock. Remaining hedge funds and institutional investors that are bullish encompass Jeffrey Gates’s Gates Capital Management, Richard Merage’s MIG Capital and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position MIG Capital allocated the biggest weight to Armstrong World Industries, Inc. (NYSE:AWI), around 4.46% of its 13F portfolio. Gates Capital Management is also relatively very bullish on the stock, designating 3.25 percent of its 13F equity portfolio to AWI.

Seeing as Armstrong World Industries, Inc. (NYSE:AWI) has experienced a decline in interest from the entirety of the hedge funds we track, it’s safe to say that there were a few money managers who sold off their full holdings in the first quarter. Intriguingly, Gabriel Plotkin’s Melvin Capital Management said goodbye to the biggest investment of the “upper crust” of funds monitored by Insider Monkey, totaling an estimated $79.4 million in stock. Clint Carlson’s fund, Carlson Capital, also said goodbye to its stock, about $13.9 million worth. These moves are interesting, as aggregate hedge fund interest was cut by 4 funds in the first quarter.

Let’s now review hedge fund activity in other stocks similar to Armstrong World Industries, Inc. (NYSE:AWI). We will take a look at First Solar, Inc. (NASDAQ:FSLR), Landstar System, Inc. (NASDAQ:LSTR), Spire Inc. (NYSE:SR), and National Oilwell Varco, Inc. (NYSE:NOV). This group of stocks’ market values are similar to AWI’s market value.

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.5 hedge funds with bullish positions and the average amount invested in these stocks was $206 million. That figure was $323 million in AWI’s case. National Oilwell Varco, Inc. (NYSE:NOV) is the most popular stock in this table. On the other hand Spire Inc. (NYSE:SR) is the least popular one with only 13 bullish hedge fund positions. Armstrong World Industries, Inc. (NYSE:AWI) 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 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 18.6% in 2020 through July 27th and surpassed the market by 17.1 percentage points. Unfortunately AWI wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); AWI investors were disappointed as the stock returned 3% since Q1 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.

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