Is American Water Works Company, Inc. (AWK) A Good Stock To Buy?

Before we spend countless hours researching a company, we like to analyze what insiders, hedge funds and billionaire investors think of the stock first. This is a necessary first step in our investment process because our research has shown that the elite investors’ consensus returns have been exceptional. In the following paragraphs, we find out what the billionaire investors and hedge funds think of American Water Works Company, Inc. (NYSE:AWK).

Hedge fund interest in American Water Works Company, Inc. (NYSE:AWK) shares was flat at the end of last quarter. This is usually a negative indicator. Our calculations also showed that AWK isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings). The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Magna International Inc. (NYSE:MGA), Yum China Holdings, Inc. (NYSE:YUMC), and Lufax Holding Ltd (NYSE:LU) to gather more data points.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 79 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

Cliff Asness of AQR Capital Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 daily newsletter on our homepage. With all of this in mind we’re going to analyze the key hedge fund action encompassing American Water Works Company, Inc. (NYSE:AWK).

Do Hedge Funds Think AWK Is A Good Stock To Buy Now?

At the end of the second quarter, a total of 30 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. By comparison, 30 hedge funds held shares or bullish call options in AWK a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Impax Asset Management held the most valuable stake in American Water Works Company, Inc. (NYSE:AWK), which was worth $858.8 million at the end of the second quarter. On the second spot was AQR Capital Management which amassed $54.9 million worth of shares. D E Shaw, Adage Capital Management, and GLG Partners 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 Trellus Management Company allocated the biggest weight to American Water Works Company, Inc. (NYSE:AWK), around 5.49% of its 13F portfolio. Impax Asset Management is also relatively very bullish on the stock, setting aside 3.79 percent of its 13F equity portfolio to AWK.

Because American Water Works Company, Inc. (NYSE:AWK) has witnessed declining sentiment from the aggregate hedge fund industry, it’s safe to say that there exists a select few hedge funds that decided to sell off their positions entirely last quarter. Intriguingly, Paul Marshall and Ian Wace’s Marshall Wace LLP sold off the biggest investment of the “upper crust” of funds watched by Insider Monkey, totaling an estimated $27.7 million in stock, and Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital was right behind this move, as the fund sold off about $19 million worth. These moves are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as American Water Works Company, Inc. (NYSE:AWK) but similarly valued. We will take a look at Magna International Inc. (NYSE:MGA), Yum China Holdings, Inc. (NYSE:YUMC), Lufax Holding Ltd (NYSE:LU), Garmin Ltd. (NASDAQ:GRMN), Franco-Nevada Corporation (NYSE:FNV), Delta Air Lines, Inc. (NYSE:DAL), and Arista Networks Inc (NYSE:ANET). All of these stocks’ market caps match AWK’s market cap.

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As you can see these stocks had an average of 31.7 hedge funds with bullish positions and the average amount invested in these stocks was $689 million. That figure was $1077 million in AWK’s case. Delta Air Lines, Inc. (NYSE:DAL) is the most popular stock in this table. On the other hand Lufax Holding Ltd (NYSE:LU) is the least popular one with only 19 bullish hedge fund positions. American Water Works Company, Inc. (NYSE:AWK) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for AWK is 45.8. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 24.9% in 2021 through October 15th and still beat the market by 4.5 percentage points. A small number of hedge funds were also right about betting on AWK as the stock returned 11.6% since the end of the second quarter (through 10/15) and outperformed the market by an even larger margin.

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