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With the third-quarter round of 13F filings behind us it is time to take a look at the stocks in which some of the best money managers in the world preferred to invest or sell heading into the fourth quarter. One of these stocks was Houlihan Lokey Inc (NYSE:HLI).
Is HLI a good stock to buy now? Houlihan Lokey Inc (NYSE:HLI) shareholders have witnessed a decrease in activity from the world's largest hedge funds of late. Houlihan Lokey Inc (NYSE:HLI) was in 14 hedge funds' portfolios at the end of the third quarter of 2020. The all time high for this statistic is 24. Our calculations also showed that HLI isn't among the 30 most popular stocks among hedge funds (click for Q3 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.
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' 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 66 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.
Fred DiSanto of Ancora Advisors
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best blue chip stocks 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. Now we're going to take a peek at the latest hedge fund action regarding Houlihan Lokey Inc (NYSE:HLI).
Do Hedge Funds Think HLI Is A Good Stock To Buy Now?
Heading into the fourth quarter of 2020, a total of 14 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -42% from the second quarter of 2020. Below, you can check out the change in hedge fund sentiment towards HLI over the last 21 quarters. With hedgies' capital changing hands, there exists a few key hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).
When looking at the institutional investors followed by Insider Monkey, Ariel Investments, managed by John W. Rogers, holds the most valuable position in Houlihan Lokey Inc (NYSE:HLI). Ariel Investments has a $30.8 million position in the stock, comprising 0.4% of its 13F portfolio. Coming in second is Chuck Royce of Royce & Associates, with a $30.1 million position; the fund has 0.3% of its 13F portfolio invested in the stock. Some other professional money managers with similar optimism include Noam Gottesman's GLG Partners, Frederick DiSanto's Ancora Advisors and Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital. In terms of the portfolio weights assigned to each position Ancora Advisors allocated the biggest weight to Houlihan Lokey Inc (NYSE:HLI), around 0.51% of its 13F portfolio. Ariel Investments is also relatively very bullish on the stock, designating 0.45 percent of its 13F equity portfolio to HLI.
Because Houlihan Lokey Inc (NYSE:HLI) has experienced declining sentiment from the aggregate hedge fund industry, we can see that there is a sect of fund managers who sold off their entire stakes in the third quarter. It's worth mentioning that Benjamin A. Smith's Laurion Capital Management sold off the largest investment of the 750 funds watched by Insider Monkey, totaling an estimated $3.4 million in stock, and David Paradice's Paradice Investment Management was right behind this move, as the fund dumped about $2.7 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest was cut by 10 funds in the third quarter.
Let's now take a look at hedge fund activity in other stocks similar to Houlihan Lokey Inc (NYSE:HLI). These stocks are TFS Financial Corporation (NASDAQ:TFSL), Inovalon Holdings Inc (NASDAQ:INOV), Healthcare Realty Trust Inc (NYSE:HR), SSR Mining Inc. (NASDAQ:SSRM), GoHealth, Inc. (NASDAQ:GOCO), Silgan Holdings Inc. (NASDAQ:SLGN), and NeoGenomics, Inc. (NASDAQ:NEO). All of these stocks' market caps match HLI's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TFSL,9,119038,-2 INOV,20,112024,7 HR,18,166333,-4 SSRM,18,306021,0 GOCO,17,633764,17 SLGN,15,207950,-4 NEO,17,78934,-2 Average,16.3,232009,1.7 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.3 hedge funds with bullish positions and the average amount invested in these stocks was $232 million. That figure was $117 million in HLI's case. Inovalon Holdings Inc (NASDAQ:INOV) is the most popular stock in this table. On the other hand TFS Financial Corporation (NASDAQ:TFSL) is the least popular one with only 9 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 35.2. 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 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks gained 32.9% in 2020 through December 8th and still beat the market by 16.2 percentage points. A small number of hedge funds were also right about betting on HLI as the stock returned 18% since the end of the third quarter (through 12/8) and outperformed the market by an even larger margin.
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Disclosure: None. This article was originally published at Insider Monkey.