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

Asma UL Husna

Sat, Mar 30, 2019, 8:22 PM

Like everyone else, elite investors make mistakes. Some of their top consensus picks, such as Amazon, Facebook and Alibaba, have not done well in Q4 due to various reasons. Nevertheless, the data show elite investors' consensus picks have done well on average over the long-term. The top 15 S&P 500 stocks among hedge funds at the end of September 2018 returned an average of 1% through March 15th whereas the S&P 500 Index ETF lost 2.2% during the same period. Because their consensus picks have done well, we pay attention to what elite funds think before doing extensive research on a stock. In this article, we take a closer look at American Water Works Company, Inc. (NYSE:AWK) from the perspective of those elite funds.

American Water Works Company, Inc. (NYSE:AWK) has seen an increase in enthusiasm from smart money of late. Overall hedge fund sentiment towards AWK has never been this bullish. This is usually a very bullish signal. For example hedge fund sentiment in Xilinx Inc. (XLNX) was also at its all time high at the beginning of this year and the stock returned more than 46% in 2.5 months. We observed a similar performance from Progressive Corporation (PGR) which returned 27% and outperformed the SPY by nearly 14 percentage points in 2.5 months. Hedge fund sentiment towards IQVIA Holdings Inc. (IQV), Brookfield Asset Management Inc. (BAM), Atlassian Corporation Plc (TEAM), RCL, MTB and CRH hit all time highs at the end of December, and all of these stocks returned more than 20% in the first 2.5 months of this year.

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' large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 32 percentage points since May 2014 through March 12, 2019 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that'll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.5% through March 12, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Let's take a glance at the fresh hedge fund action surrounding American Water Works Company, Inc. (NYSE:AWK).

How are hedge funds trading American Water Works Company, Inc. (NYSE:AWK)?

At the end of the fourth quarter, a total of 28 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 40% from one quarter earlier. On the other hand, there were a total of 23 hedge funds with a bullish position in AWK a year ago. With hedgies' sentiment swirling, there exists a select group of key hedge fund managers who were upping their stakes significantly (or already accumulated large positions).

Among these funds, Impax Asset Management held the most valuable stake in American Water Works Company, Inc. (NYSE:AWK), which was worth $218 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $103.9 million worth of shares. Moreover, AQR Capital Management, Marshall Wace LLP, and Citadel Investment Group were also bullish on American Water Works Company, Inc. (NYSE:AWK), allocating a large percentage of their portfolios to this stock.

As aggregate interest increased, key hedge funds were leading the bulls' herd. Marshall Wace LLP, managed by Paul Marshall and Ian Wace, created the biggest position in American Water Works Company, Inc. (NYSE:AWK). Marshall Wace LLP had $26.1 million invested in the company at the end of the quarter. Jonathan Barrett and Paul Segal's Luminus Management also made a $18.7 million investment in the stock during the quarter. The other funds with brand new AWK positions are Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital, Brian Olson, Baehyun Sung, and Jamie Waters's Blackstart Capital, and Bruce Kovner's Caxton Associates LP.

Let's check out hedge fund activity in other stocks similar to American Water Works Company, Inc. (NYSE:AWK). These stocks are Weyerhaeuser Co. (NYSE:WY), CenturyLink, Inc. (NYSE:CTL), CBS Corporation (NYSE:CBS), and International Paper Company (NYSE:IP). All of these stocks' market caps match AWK's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position WY,37,568037,2 CTL,31,1252514,7 CBS,45,903498,0 IP,34,435169,6 Average,36.75,789805,3.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 36.75 hedge funds with bullish positions and the average amount invested in these stocks was $790 million. That figure was $546 million in AWK's case. CBS Corporation (NYSE:CBS) is the most popular stock in this table. On the other hand CenturyLink, Inc. (NYSE:CTL) is the least popular one with only 31 bullish hedge fund positions. Compared to these stocks American Water Works Company, Inc. (NYSE:AWK) is even less popular than CTL. Our calculations showed that top 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. An increasing number of hedge funds were also right about betting on AWK, though not to the same extent, as the stock returned 17.1% and outperformed the market as well.

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

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