Hedge Funds Have Never Been This Bullish On American Water Works Company, Inc. (AWK)

The market has been volatile in the last few months as the Federal Reserve finalized its rate cuts and uncertainty looms over trade negotiations with China. Small cap stocks have been hit hard as a result, as the Russell 2000 ETF (IWM) has underperformed the larger S&P 500 ETF (SPY) by more than 10 percentage points over the last 12 months. SEC filings and hedge fund investor letters indicate that the smart money seems to be paring back their overall long exposure since summer months, though some funds increased their exposure dramatically at the end of Q3 and the beginning of Q4. In this article, we analyze what the smart money thinks of American Water Works Company, Inc. (NYSE:AWK) and find out how it is affected by hedge funds’ moves.

American Water Works Company, Inc. (NYSE:AWK) has experienced an increase in hedge fund interest lately. Our calculations also showed that AWK isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).

Video: Click the image to 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 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

Jonathan Barrett of Luminus Management

Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world’s most bearish hedge fund that’s more convinced than ever that a crash is coming, our long-short investment strategy doesn’t rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds‘ buy/sell signals. Let’s check out the new hedge fund action surrounding American Water Works Company, Inc. (NYSE:AWK).

Hedge fund activity in American Water Works Company, Inc. (NYSE:AWK)

At the end of the third quarter, a total of 35 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 52% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards AWK over the last 17 quarters. With hedge funds’ positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

More specifically, Impax Asset Management was the largest shareholder of American Water Works Company, Inc. (NYSE:AWK), with a stake worth $260 million reported as of the end of September. Trailing Impax Asset Management was AQR Capital Management, which amassed a stake valued at $139.6 million. Citadel Investment Group, Luminus Management, and Two Sigma Advisors were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Blackstart Capital allocated the biggest weight to American Water Works Company, Inc. (NYSE:AWK), around 6.72% of its portfolio. Trellus Management Company is also relatively very bullish on the stock, setting aside 6.43 percent of its 13F equity portfolio to AWK.

As industrywide interest jumped, specific money managers have jumped into American Water Works Company, Inc. (NYSE:AWK) headfirst. Blackstart Capital, managed by Brian Olson, Baehyun Sung, and Jamie Waters, established the most valuable position in American Water Works Company, Inc. (NYSE:AWK). Blackstart Capital had $12.8 million invested in the company at the end of the quarter. Clint Carlson’s Carlson Capital also initiated a $10.4 million position during the quarter. The following funds were also among the new AWK investors: David Harding’s Winton Capital Management, David E. Shaw’s D E Shaw, and Donald Sussman’s Paloma Partners.

Let’s check out hedge fund activity in other stocks similar to American Water Works Company, Inc. (NYSE:AWK). These stocks are Aptiv PLC (NYSE:APTV), Verisign, Inc. (NASDAQ:VRSN), Corning Incorporated (NYSE:GLW), and Telefonica Brasil SA (NYSE:VIV). This group of stocks’ market valuations match AWK’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 24.25 hedge funds with bullish positions and the average amount invested in these stocks was $1688 million. That figure was $652 million in AWK’s case. Verisign, Inc. (NASDAQ:VRSN) is the most popular stock in this table. On the other hand Telefonica Brasil SA (NYSE:VIV) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks American Water Works Company, Inc. (NYSE:AWK) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately AWK wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on AWK were disappointed as the stock returned -2.2% during the first two months of the fourth 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 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.

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