The latest 13F reporting period has come and gone, and Insider Monkey is again at the forefront when it comes to making use of this gold mine of data. We at Insider Monkey have plowed through 823 13F filings that hedge funds and well-known value investors are required to file by the SEC. The 13F filings show the funds' and investors' portfolio positions as of June 30th, when the S&P 500 Index was trading around the 3100 level. Stocks kept going up since then. In this article we look at how hedge funds traded Houlihan Lokey Inc (NYSE:HLI) and determine whether the smart money was really smart about this stock.
Houlihan Lokey Inc (NYSE:HLI) has seen an increase in hedge fund sentiment of late. Houlihan Lokey Inc (NYSE:HLI) was in 24 hedge funds' portfolios at the end of June. The all time high for this statistics is 18. This means the bullish number of hedge fund positions in this stock currently sits at its all time high. There were 15 hedge funds in our database with HLI holdings at the end of March. Our calculations also showed that HLI 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.
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 56 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
Chuck Royce of Royce & Associates
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. 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. Keeping this in mind we're going to review the fresh hedge fund action encompassing Houlihan Lokey Inc (NYSE:HLI).
What have hedge funds been doing with Houlihan Lokey Inc (NYSE:HLI)?
Heading into the third quarter of 2020, a total of 24 of the hedge funds tracked by Insider Monkey were long this stock, a change of 60% from the previous quarter. By comparison, 15 hedge funds held shares or bullish call options in HLI a year ago. With the smart money's sentiment swirling, there exists an "upper tier" of key hedge fund managers who were boosting their holdings considerably (or already accumulated large positions).
Among these funds, Royce & Associates held the most valuable stake in Houlihan Lokey Inc (NYSE:HLI), which was worth $38.6 million at the end of the third quarter. On the second spot was Ariel Investments which amassed $29.8 million worth of shares. Millennium Management, Citadel Investment Group, and Renaissance Technologies 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 Ariel Investments allocated the biggest weight to Houlihan Lokey Inc (NYSE:HLI), around 0.45% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, designating 0.43 percent of its 13F equity portfolio to HLI.
As one would reasonably expect, specific money managers have been driving this bullishness. Laurion Capital Management, managed by Benjamin A. Smith, created the biggest position in Houlihan Lokey Inc (NYSE:HLI). Laurion Capital Management had $3.4 million invested in the company at the end of the quarter. Parvinder Thiara's Athanor Capital also made a $1.3 million investment in the stock during the quarter. The other funds with brand new HLI positions are Jinghua Yan's TwinBeech Capital, Qing Li's Sciencast Management, and Minhua Zhang's Weld Capital Management.
Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Houlihan Lokey Inc (NYSE:HLI) but similarly valued. These stocks are Brixmor Property Group Inc (NYSE:BRX), Acuity Brands, Inc. (NYSE:AYI), TopBuild Corp (NYSE:BLD), Nexstar Media Group, Inc. (NASDAQ:NXST), InVitae Corporation (NYSE:NVTA), frontdoor, inc. (NASDAQ:FTDR), and LendingTree, Inc (NASDAQ:TREE). This group of stocks' market valuations are similar to HLI's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BRX,24,82889,-4 AYI,38,650114,7 BLD,30,141163,10 NXST,42,822223,1 NVTA,16,769078,6 FTDR,41,746277,8 TREE,15,102759,-6 Average,29.4,473500,3.1 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 29.4 hedge funds with bullish positions and the average amount invested in these stocks was $474 million. That figure was $147 million in HLI's case. Nexstar Media Group, Inc. (NASDAQ:NXST) is the most popular stock in this table. On the other hand LendingTree, Inc (NASDAQ:TREE) is the least popular one with only 15 bullish hedge fund positions. Houlihan Lokey Inc (NYSE:HLI) is not the least popular stock in this group but hedge fund interest is still below average. Our overall hedge fund sentiment score for HLI is 56.7. 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. This is a slightly negative signal and we'd rather spend our time researching stocks that hedge funds are piling on. 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 21.3% in 2020 through September 25th and surpassed the market by 17.7 percentage points. Unfortunately HLI wasn't nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); HLI investors were disappointed as the stock returned 1.6% since Q2 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.
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Disclosure: None. This article was originally published at Insider Monkey.