It was a rough fourth quarter for many hedge funds, which were naturally unable to overcome the big dip in the broad market, as the S&P 500 fell by about 4.8% during 2018 and average hedge fund losing about 1%. The Russell 2000, composed of smaller companies, performed even worse, trailing the S&P by more than 6 percentage points, as investors fled less-known quantities for safe havens. Luckily hedge funds were shifting their holdings into large-cap stocks. The 20 most popular hedge fund stocks actually generated an average return of 18.7% so far in 2019 and outperformed the S&P 500 ETF by 6.6 percentage points. We are done processing the latest 13f filings and in this article we will study how hedge fund sentiment towards Houlihan Lokey Inc (NYSE:HLI) changed during the first quarter.
Is Houlihan Lokey Inc (NYSE:HLI) ready to rally soon? Prominent investors are turning less bullish. The number of long hedge fund bets dropped by 4 lately. Our calculations also showed that HLI isn't among the 30 most popular stocks among hedge funds. HLI was in 14 hedge funds' portfolios at the end of the first quarter of 2019. There were 18 hedge funds in our database with HLI positions at the end of the previous quarter.
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 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 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.
Let's take a look at the fresh hedge fund action regarding Houlihan Lokey Inc (NYSE:HLI).
How have hedgies been trading Houlihan Lokey Inc (NYSE:HLI)?
Heading into the second quarter of 2019, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of -22% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards HLI over the last 15 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of noteworthy hedge fund managers who were increasing their holdings substantially (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Ariel Investments, managed by John W. Rogers, holds the number one position in Houlihan Lokey Inc (NYSE:HLI). Ariel Investments has a $63.2 million position in the stock, comprising 0.8% of its 13F portfolio. The second largest stake is held by Chuck Royce of Royce & Associates, with a $37.4 million position; 0.3% of its 13F portfolio is allocated to the company. Other hedge funds and institutional investors that are bullish consist of Jim Simons's Renaissance Technologies, Israel Englander's Millennium Management and John Overdeck and David Siegel's Two Sigma Advisors.
Because Houlihan Lokey Inc (NYSE:HLI) has witnessed bearish sentiment from the entirety of the hedge funds we track, we can see that there is a sect of hedge funds who were dropping their entire stakes in the third quarter. Interestingly, Noam Gottesman's GLG Partners dropped the largest position of all the hedgies watched by Insider Monkey, totaling about $1.2 million in stock. Minhua Zhang's fund, Weld Capital Management, also dumped its stock, about $1.1 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest was cut by 4 funds in the third quarter.
Let's now review hedge fund activity in other stocks - not necessarily in the same industry as Houlihan Lokey Inc (NYSE:HLI) but similarly valued. These stocks are Magnolia Oil & Gas Corporation (NYSE:MGY), Patterson-UTI Energy, Inc. (NASDAQ:PTEN), Balchem Corporation (NASDAQ:BCPC), and Iridium Communications Inc. (NASDAQ:IRDM). This group of stocks' market valuations resemble HLI's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position MGY,32,232014,0 PTEN,34,301384,-5 BCPC,7,63045,-4 IRDM,12,139662,-1 Average,21.25,184026,-2.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 21.25 hedge funds with bullish positions and the average amount invested in these stocks was $184 million. That figure was $132 million in HLI's case. Patterson-UTI Energy, Inc. (NASDAQ:PTEN) is the most popular stock in this table. On the other hand Balchem Corporation (NASDAQ:BCPC) is the least popular one with only 7 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. 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 20 most popular stocks among hedge funds returned 6.2% in Q2 through June 19th and outperformed the S&P 500 ETF (SPY) by nearly 3 percentage points. Unfortunately HLI wasn't nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); HLI investors were disappointed as the stock returned -0.2% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 13 of these stocks already outperformed the market so far in Q2.
Disclosure: None. This article was originally published at Insider Monkey.