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By Jake Mann

Though it is often overlooked, hedge fund sentiment is always an important indicator to follow. Retail investors can use fund interest to discern just which stocks are the best to hold in their own portfolios. At Insider Monkey, our empirical research shows that mimicking hedge funds is a strategy that can beat the market by double-digits annually (see the details of our market-beating strategy here).

One of the most interesting areas of our current economic landscape is in the aerospace industry. S&P holds a positive rating on this marketplace-particularly in commercial aerospace-and believes that it will be "fueled by fleet growth in the developing markets and a need to replace aging and less fuel-efficient aircraft in developed markets." Still, budgetary headwinds for some defense contractors and increased competition makes picking winners and losers harder than ever.

That's where the smart money can help.

By using hedge funds' 13F filings with the SEC, we can determine what the best aerospace stocks may be at the moment. Let's take a look at the top five.

Of the 400+ hedge funds we track, United Technologies Corporation (UTX) was held by 41 funds at the end of the last filing period, the most in the aerospace industry. United Technologies has its fingers in all aspects of this arena, from aircraft engines to air conditioning systems. This diversity predominantly acts as a boon to the company's portfolio, and a dividend dating back to the days of the Great Depression certainly doesn't hurt. The stock currently pays a yield of 2.5%, and at a forward P/E near 14x, there's something here for both value and income-seeking investors.

At the end of the third quarter-the SEC's last 13F filing period on record-United Technologies was a huge favorite of billionaire investor Ken Fisher, manager of Fisher Asset Management.

Next up we have The Boeing Company (BA), with 32 hedge funds invested. Boeing's stock price is down over 2% in the past week, as it has been forced to ground its entire 787 Dreamliner fleet until it can solve the issues surrounding its reliance on lithium ion batteries. If Boeing is able to get past this literal headwind-which was "a conscious design decision" according to one analyst-there's obvious value here. Shares of the aircraft manufacturer currently trade below sales parity, and Wall Street's average price target ($87.55) gives Boeing a 16-17% upside from current levels.

According to our records, the top hedge fund invested in Boeing at the end of the last filing period was Adage Capital Management, managed by the duo of Phil Gross and Robert Atchinson.

Sitting at No. 3 on the smart money's "list" is Triumph Group Inc. (TGI), with 20 hedgies holding long positions. Triumph has been a relatively good investment over the past month, returning close to 6%, and the stock still trades at one of the lowest earnings valuations in the industry, at 10 times year-ahead EPS. The sell-side expects bottom line growth to average 12.5% a year over the next half-decade, but it appears the markets are under-appreciating these prospects. Triumph trades at a PEG ratio of just 0.86; typically any figure below 1.0 signals that shares are on the cheap.

In fourth is Textron Inc. (TXT), with 19 funds invested. Textron is most widely known for its Cessna aircraft and Bell helicopters, and according to Zacks, both brands "are poised to grow in the double digits in the coming years."

On the whole, there may not be a better turnaround story in aerospace-at least from a growth standpoint-than Textron. Consider the following statistics: over the past five years, Textron has seen its EPS shrink by 21.6% a year. In the next half-decade, though, the sell-side forecasts this growth to average almost 30% annually. As one can expect, an earnings growth multiple near 0.6 indicates that investors are undervaluing these prospects quite heavily.

With three out of its last five quarterly earnings reports beating the Street's forecasts, we'll be watching Textron's Q4 FY2012 financials very closely on January 23rd.

Last but certainly not least, we have AAR Corp. (AIR). Fourteen hedge funds held long positions in this diversified aviation products company, which has its best prospects in the MRO (maintenance, repair and overhaul) and logistics segments. Shares of AAR have gained a whopping 21.1% over the past month on the back of a strong earnings beat (Q2 FY2013) in December. Shares of this high-flyer still trade at a forward P/E below 10x, despite their recent gains.

Source: The Smart Money's Top 5 Aerospace Stocks