Looking for stocks with high upside potential? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 26% in 2019 (through November 22nd). Conversely, hedge funds’ 20 preferred S&P 500 stocks generated a return of nearly 35% during the same period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. That's why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like Houlihan Lokey Inc (NYSE:HLI).
Is Houlihan Lokey Inc (NYSE:HLI) a safe investment now? Investors who are in the know are reducing their bets on the stock. The number of long hedge fund positions decreased by 1 lately. 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 below for Q2 rankings). HLI was in 14 hedge funds' portfolios at the end of September. There were 15 hedge funds in our database with HLI holdings at the end of the previous quarter. Video: Click the image to 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.
[caption id="attachment_673253" align="aligncenter" width="473"] Jeffrey Talpins of Element Capital[/caption]
We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds' buy/sell signals. We're going to analyze the latest hedge fund action surrounding Houlihan Lokey Inc (NYSE:HLI).
How are hedge funds trading Houlihan Lokey Inc (NYSE:HLI)?
At Q3's end, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of -7% from the previous quarter. On the other hand, there were a total of 14 hedge funds with a bullish position in HLI a year ago. With hedge funds' capital changing hands, there exists a few noteworthy hedge fund managers who were increasing their stakes significantly (or already accumulated large positions).
More specifically, Ariel Investments was the largest shareholder of Houlihan Lokey Inc (NYSE:HLI), with a stake worth $49.3 million reported as of the end of September. Trailing Ariel Investments was Royce & Associates, which amassed a stake valued at $44.6 million. Marshall Wace, Azora Capital, and Element Capital Management 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 Azora Capital allocated the biggest weight to Houlihan Lokey Inc (NYSE:HLI), around 1.3% of its 13F portfolio. Ariel Investments is also relatively very bullish on the stock, designating 0.66 percent of its 13F equity portfolio to HLI.
Seeing as Houlihan Lokey Inc (NYSE:HLI) has witnessed falling interest from the entirety of the hedge funds we track, we can see that there were a few fund managers who sold off their entire stakes last quarter. At the top of the heap, Renaissance Technologies cut the biggest stake of the 750 funds monitored by Insider Monkey, comprising close to $10.4 million in stock, and Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital was right behind this move, as the fund said goodbye to about $0.9 million worth. These transactions are intriguing to say the least, as total hedge fund interest was cut by 1 funds last quarter.
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 Strategic Education, Inc. (NASDAQ:STRA), Nextera Energy Partners LP (NYSE:NEP), Qualys Inc (NASDAQ:QLYS), and Old National Bancorp (NASDAQ:ONB). 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 STRA,19,213625,6 NEP,15,66400,2 QLYS,17,113053,0 ONB,10,23347,0 Average,15.25,104106,2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 15.25 hedge funds with bullish positions and the average amount invested in these stocks was $104 million. That figure was $137 million in HLI's case. Strategic Education, Inc. (NASDAQ:STRA) is the most popular stock in this table. On the other hand Old National Bancorp (NASDAQ:ONB) is the least popular one with only 10 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 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 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 5.7% during the first two months of the fourth quarter 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 70 percent of these stocks already outperformed the market in Q4.
Disclosure: None. This article was originally published at Insider Monkey.