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Did Hedge Funds Drop The Ball On HEICO Corporation (HEI) ?

Abigail Fisher

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 HEICO Corporation (NYSE:HEI)? The smart money sentiment can provide an answer to this question.

HEICO Corporation (NYSE:HEI) was in 26 hedge funds' portfolios at the end of the first quarter of 2019. HEI has seen a decrease in activity from the world's largest hedge funds lately. There were 31 hedge funds in our database with HEI positions at the end of the previous quarter. Our calculations also showed that HEI isn't among the 30 most popular stocks among hedge funds.

Why do we pay any attention at all to hedge fund sentiment? 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 40 percentage points since May 2014 through May 30, 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 30.9% through May 30, 2019. That's why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Chuck Royce

Let's analyze the key hedge fund action surrounding HEICO Corporation (NYSE:HEI).

What have hedge funds been doing with HEICO Corporation (NYSE:HEI)?

At the end of the first quarter, a total of 26 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -16% from the previous quarter. By comparison, 18 hedge funds held shares or bullish call options in HEI 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.

HEI_june2019

Among these funds, Renaissance Technologies held the most valuable stake in HEICO Corporation (NYSE:HEI), which was worth $145.2 million at the end of the first quarter. On the second spot was Fisher Asset Management which amassed $123.7 million worth of shares. Moreover, Select Equity Group, Select Equity Group, and Royce & Associates were also bullish on HEICO Corporation (NYSE:HEI), allocating a large percentage of their portfolios to this stock.

Because HEICO Corporation (NYSE:HEI) has faced falling interest from the entirety of the hedge funds we track, we can see that there was a specific group of fund managers that slashed their positions entirely heading into Q3. Intriguingly, Richard Chilton's Chilton Investment Company said goodbye to the largest investment of all the hedgies watched by Insider Monkey, comprising about $47.6 million in stock. Ken Griffin's fund, Citadel Investment Group, also said goodbye to its stock, about $4.6 million worth. These moves are important to note, as total hedge fund interest dropped by 5 funds heading into Q3.

Let's go over hedge fund activity in other stocks similar to HEICO Corporation (NYSE:HEI). These stocks are Celanese Corporation (NYSE:CE), Martin Marietta Materials, Inc. (NYSE:MLM), TransUnion (NYSE:TRU), and Mid America Apartment Communities Inc (NYSE:MAA). This group of stocks' market valuations resemble HEI's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CE,21,594377,-5 MLM,36,2138083,2 TRU,29,1570292,1 MAA,21,355779,0 Average,26.75,1164633,-0.5 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 26.75 hedge funds with bullish positions and the average amount invested in these stocks was $1165 million. That figure was $744 million in HEI's case. Martin Marietta Materials, Inc. (NYSE:MLM) is the most popular stock in this table. On the other hand Celanese Corporation (NYSE:CE) is the least popular one with only 21 bullish hedge fund positions. HEICO Corporation (NYSE:HEI) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 1.9% in Q2 through May 30th and outperformed the S&P 500 ETF (SPY) by more than 3 percentage points. A small number of hedge funds were also right about betting on HEI as the stock returned 26.2% during the same time frame and outperformed the market by an even larger margin.

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

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