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Why Armstrong World Industries (AWI) Stock is a Compelling Investment Case

Black Bear Value Partners recently released its Q3 2020 Investor Letter, a copy of which you can download here. The fund posted a return of -22.3% (net) in the first nine months of 2020, underperforming its benchmark, the S&P 500 Index which returned 5.6% in the same period. You should check out Black Bear Value Partners’ top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.

In the said letter, Black Bear Value Partners highlighted a few stocks and Armstrong World Industries Inc (NYSE:AWI) is one of them. Armstrong World Industries Inc (NYSE:AWI) designs and manufactures floors, ceilings, and cabinets. Year-to-date, Armstrong World Industries Inc (NYSE:AWI) stock lost 28.1% and on October 12th it had a closing price of $69.01. Here is what Black Bear Value Partners said:

“AWI is a 129-year old designer and manufacturer of commercial and residential ceiling, wall and suspension systems. 95% of their sales are for commercial use with the majority (70%) for repair and remodel (R&R). This translates to less sensitivity to new construction as R&R is a more stable revenue stream.

The US ceiling industry is consolidated with the top 3 companies controlling 98% of the market. AWI is the market leader with 65% market share. Because of a large previously installed base and exclusive distributor relationships, they’ve been able to increase pricing in the 5+% range annually.

On the 2nd quarter earnings call management reiterated their medium-term targets of high single digit revenue growth and free cash flow growth of 10+% annually. I underwrite slower growth and still come up with a security price that is significantly higher than where it trades today. With low leverage and steady cash production there are opportunities for them to both buy-in their stock and make bolt-on acquisitions.

AWI should be able to generate $4-$5 in annual free cash flow which implies a current yield of 6-8% that should be able to grow 5-7% per year over the long-run. This is an excellent business at a cheap price.”

Vadym Andrushchenko/Shutterstock.com

In Q2 2020, the number of bullish hedge fund positions on Armstrong World Industries Inc (NYSE:AWI) stock increased by about 70% from the previous quarter (see the chart here), so a number of other hedge fund managers seem to agree with AWI’s growth potential. Our calculations showed that Armstrong World Industries Inc (NYSE:AWI) isn’t ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we are checking out this junior gold mining stock and we recommended this real estate stock to our monthly premium newsletter subscribers. 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. You can subscribe to our free enewsletter below to receive our stories in your inbox:

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