We are still in an overall bull market and many stocks that smart money investors were piling into surged through October 17th. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 45% and 39% respectively. Hedge funds' top 3 stock picks returned 34.4% this year and beat the S&P 500 ETFs by 13 percentage points. Investing in index funds guarantees you average returns, not superior returns. We are looking to generate superior returns for our readers. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Houlihan Lokey Inc (NYSE:HLI).
Houlihan Lokey Inc (NYSE:HLI) has seen an increase in enthusiasm from smart money of late. HLI was in 15 hedge funds' portfolios at the end of June. There were 14 hedge funds in our database with HLI holdings at the end of the previous quarter. Our calculations also showed that HLI isn't among the 30 most popular stocks among hedge funds (view the video below). Video: Click the image to 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 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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.
Unlike former hedge manager, Dr. Steve Sjuggerud, who is convinced Dow will soar past 40000, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. We're going to take a glance at the latest hedge fund action surrounding Houlihan Lokey Inc (NYSE:HLI).
How are hedge funds trading Houlihan Lokey Inc (NYSE:HLI)?
At Q2's end, a total of 15 of the hedge funds tracked by Insider Monkey were long this stock, a change of 7% from one quarter earlier. Below, you can check out the change in hedge fund sentiment towards HLI over the last 16 quarters. With hedge funds' positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were increasing their holdings considerably (or already accumulated large positions).
More specifically, Ariel Investments was the largest shareholder of Houlihan Lokey Inc (NYSE:HLI), with a stake worth $48.5 million reported as of the end of March. Trailing Ariel Investments was Royce & Associates, which amassed a stake valued at $26 million. Element Capital Management, Renaissance Technologies, and Marshall Wace LLP were also very fond of the stock, giving the stock large weights in their portfolios.
Now, some big names were leading the bulls' herd. Element Capital Management, managed by Jeffrey Talpins, initiated the most valuable position in Houlihan Lokey Inc (NYSE:HLI). Element Capital Management had $21.4 million invested in the company at the end of the quarter. Noam Gottesman's GLG Partners also initiated a $1.2 million position during the quarter. The other funds with brand new HLI positions are Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital and Mike Vranos's Ellington.
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 Iovance Biotherapeutics, Inc. (NASDAQ:IOVA), Ryder System, Inc. (NYSE:R), Hamilton Lane Incorporated (NASDAQ:HLNE), and Holly Energy Partners, L.P. (NYSE:HEP). This group of stocks' market valuations are closest to HLI's market valuation.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position IOVA,22,1311346,-3 R,21,352543,2 HLNE,6,56143,-4 HEP,1,2228,-3 Average,12.5,430565,-2 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 12.5 hedge funds with bullish positions and the average amount invested in these stocks was $431 million. That figure was $124 million in HLI's case. Iovance Biotherapeutics, Inc. (NASDAQ:IOVA) is the most popular stock in this table. On the other hand Holly Energy Partners, L.P. (NYSE:HEP) is the least popular one with only 1 bullish hedge fund positions. Houlihan Lokey Inc (NYSE:HLI) is not the most popular stock in this group but hedge fund interest is still above average. Our calculations showed that top 20 most popular stocks among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on HLI, though not to the same extent, as the stock returned 2% during the third quarter and outperformed the market as well.
Disclosure: None. This article was originally published at Insider Monkey.