Were These Hedge Funds Right About Loading Up On A. O. Smith Corporation (AOS)?

Although the masses and most of the financial media blame hedge funds for their exorbitant fee structure and disappointing performance, these investors have proved to have great stock picking abilities over the years (that’s why their assets under management continue to swell). We believe hedge fund sentiment should serve as a crucial tool of an individual investor’s stock selection process, as it may offer great insights of how the brightest minds of the finance industry feel about specific stocks. After all, these people have access to smartest analysts and expensive data/information sources that individual investors can’t match. So should one consider investing in A. O. Smith Corporation (NYSE:AOS)? The smart money sentiment can provide an answer to this question.

A. O. Smith Corporation (NYSE:AOS) has seen an increase in activity from the world’s largest hedge funds lately. A. O. Smith Corporation (NYSE:AOS) was in 35 hedge funds’ portfolios at the end of the second quarter of 2020. The all time high for this statistics is 33. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. Our calculations also showed that AOS isn’t among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

According to most market participants, hedge funds are seen as worthless, old investment vehicles of yesteryear. While there are more than 8000 funds trading today, Our researchers hone in on the aristocrats of this group, about 850 funds. These investment experts orchestrate most of all hedge funds’ total asset base, and by tracking their best picks, Insider Monkey has uncovered many investment strategies that have historically beaten the market. Insider Monkey’s flagship short hedge fund strategy outstripped the S&P 500 short ETFs by around 20 percentage points annually since its inception in March 2017. Our portfolio of short stocks lost 34% since February 2017 (through August 17th) even though the market was up 53% during the same period. We just shared a list of 8 short targets in our latest quarterly update .

Jeffrey Ubben of ValueAct Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Last week, most investors overlooked a major development because of the presidential elections: Oregon became the first state to legalize psychedelic mushrooms which are shown to have promising results in treating depression, addiction, and PTSD in early stage academic studies. So, we are checking out this psychedelic drug stock idea right now. We go through lists like the 10 best high dividend stocks to buy to identify high dividend stocks with upside potential in this low interest rate environment. 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 website to get excerpts of these letters in your inbox. Now we’re going to take a look at the new hedge fund action encompassing A. O. Smith Corporation (NYSE:AOS).

Hedge fund activity in A. O. Smith Corporation (NYSE:AOS)

At the end of the second quarter, a total of 35 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 40% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards AOS over the last 20 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Generation Investment Management held the most valuable stake in A. O. Smith Corporation (NYSE:AOS), which was worth $198.1 million at the end of the third quarter. On the second spot was ValueAct Capital which amassed $98.6 million worth of shares. Two Sigma Advisors, D E Shaw, and Millennium Management 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 Generation Investment Management allocated the biggest weight to A. O. Smith Corporation (NYSE:AOS), around 1.14% of its 13F portfolio. ValueAct Capital is also relatively very bullish on the stock, designating 1.13 percent of its 13F equity portfolio to AOS.

As industrywide interest jumped, specific money managers were leading the bulls’ herd. Millennium Management, managed by Israel Englander, created the most valuable position in A. O. Smith Corporation (NYSE:AOS). Millennium Management had $7.7 million invested in the company at the end of the quarter. Richard SchimeláandáLawrence Sapanski’s Cinctive Capital Management also made a $6 million investment in the stock during the quarter. The following funds were also among the new AOS investors: Paul Marshall and Ian Wace’s Marshall Wace LLP, Greg Eisner’s Engineers Gate Manager, and Michael Gelband’s ExodusPoint Capital.

Let’s go over hedge fund activity in other stocks similar to A. O. Smith Corporation (NYSE:AOS). These stocks are Juniper Networks, Inc. (NYSE:JNPR), ACADIA Pharmaceuticals Inc. (NASDAQ:ACAD), Perrigo Company plc (NYSE:PRGO), GCI Liberty, Inc. (NASDAQ:GLIBA), Snap-on Incorporated (NYSE:SNA), Trex Company, Inc. (NYSE:TREX), and Iron Mountain Incorporated (NYSE:IRM). This group of stocks’ market valuations are closest to AOS’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 33.3 hedge funds with bullish positions and the average amount invested in these stocks was $953 million. That figure was $410 million in AOS’s case. GCI Liberty, Inc. (NASDAQ:GLIBA) is the most popular stock in this table. On the other hand Snap-on Incorporated (NYSE:SNA) is the least popular one with only 20 bullish hedge fund positions. A. O. Smith Corporation (NYSE:AOS) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for AOS is 62.7. 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 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 23% in 2020 through October 30th and still beat the market by 20.1 percentage points. Hedge funds were also right about betting on AOS as the stock returned 10.8% since the end of Q2 (through 10/30) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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