Black Bear Value Partners, an investment management firm, published its first quarter 2021 investor letter – a copy of which can be downloaded here. A return of +13.6% was delivered by the fund for the first quarter of 2021, outperforming the S&P 500 Index that delivered a +4.4% return for the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Black Bear Value Partners, in its Q1 2021 investor letter, mentioned Armstrong World Industries, Inc. (NYSE: AWI), and shared their insights on the company. Armstrong World Industries, Inc. is a Lancaster, Pennsylvania-based walls and ceilings manufacturer that currently has a $4.9 billion market capitalization. Since the beginning of the year, AWI delivered a 39.92% return, while its 12-month gains are up by 37.14%. As of June 16, 2021, the stock closed at $107.02 per share.
Here is what Black Bear Value Partners has to say about Armstrong World Industries, Inc. in its Q1 2021 investor letter:
“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
Despite COVID related shutdowns AWI managed to generate ~$250MM in FCF which at today’s price equates to ~6% FCF yield. They have experienced sequential improvement in their end markets and should see more improvement as the world reopens.
AWI should be able to generate $4-$5 in annual free cash flow which implies a current yield of 5-6% that should be able to grow 5-7% per year over the long-run. This is an excellent business at a cheap price.”
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Our calculations show that Armstrong World Industries, Inc. (NYSE: AWI) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the first quarter of 2021, Armstrong World Industries, Inc. was in 25 hedge fund portfolios, compared to 31 funds in the fourth quarter of 2020. AWI delivered a 10.14% return in the past 3 months.
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 S&P 500 ETFs by 115 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 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.
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Disclosure: None. This article is originally published at Insider Monkey.
