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Did Hedge Funds Make The Right Call On HEICO Corporation (HEI) ?

At the end of February we announced the arrival of the first US recession since 2009 and we predicted that the market will decline by at least 20% in (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. In this article, we will take a closer look at hedge fund sentiment towards HEICO Corporation (NYSE:HEI) at the end of the first quarter and determine whether the smart money was really smart about this stock.

HEICO Corporation (NYSE:HEI) shareholders have witnessed a decrease in hedge fund sentiment recently. HEI was in 39 hedge funds’ portfolios at the end of March. There were 57 hedge funds in our database with HEI positions at the end of the previous quarter. Our calculations also showed that HEI isn’t among the 30 most popular stocks among hedge funds (click for Q1 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.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that a select group of hedge fund holdings outperformed the S&P 500 ETFs by 58 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’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 36% through May 18th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Andy Redleaf Andrew Redleaf Whitebox Advisors

Andy Redleaf of Whitebox Advisors

At Insider Monkey we scour multiple sources to uncover the next great investment idea. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Hedge fund sentiment towards Tesla reached its all time high at the end of 2019 and Tesla shares more than tripled this year. We are trying to identify other EV revolution winners, so we are checking out this tiny lithium stock. Now we’re going to take a look at the latest hedge fund action encompassing HEICO Corporation (NYSE:HEI).

Hedge fund activity in HEICO Corporation (NYSE:HEI)

At the end of the first quarter, a total of 39 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -32% from one quarter earlier. By comparison, 26 hedge funds held shares or bullish call options in HEI a year ago. With hedgies’ sentiment swirling, there exists an “upper tier” of noteworthy hedge fund managers who were adding to their stakes meaningfully (or already accumulated large positions).

Is HEI A Good Stock To Buy?

Among these funds, Select Equity Group held the most valuable stake in HEICO Corporation (NYSE:HEI), which was worth $85.6 million at the end of the third quarter. On the second spot was Fisher Asset Management which amassed $84.8 million worth of shares. Renaissance Technologies, Gobi Capital, and Silver Heights 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 Silver Heights Capital Management allocated the biggest weight to HEICO Corporation (NYSE:HEI), around 24.09% of its 13F portfolio. Gobi Capital is also relatively very bullish on the stock, designating 9.18 percent of its 13F equity portfolio to HEI.

Seeing as HEICO Corporation (NYSE:HEI) has faced declining sentiment from the aggregate hedge fund industry, we can see that there exists a select few money managers who sold off their entire stakes last quarter. At the top of the heap, Renaissance Technologies dropped the biggest stake of all the hedgies followed by Insider Monkey, totaling an estimated $36.3 million in stock. Steve Cohen’s fund, Point72 Asset Management, also cut its stock, about $30.9 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest was cut by 18 funds last quarter.

Let’s check out hedge fund activity in other stocks similar to HEICO Corporation (NYSE:HEI). We will take a look at TELUS Corporation (NYSE:TU), Ulta Beauty, Inc. (NASDAQ:ULTA), The Liberty SiriusXM Group (NASDAQ:LSXMA), and Loews Corporation (NYSE:L). This group of stocks’ market valuations match HEI’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
TU 15 197962 2
ULTA 46 925549 5
LSXMA 48 1087620 -2
L 21 107581 -3
Average 32.5 579678 0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 32.5 hedge funds with bullish positions and the average amount invested in these stocks was $580 million. That figure was $602 million in HEI’s case. The Liberty SiriusXM Group (NASDAQ:LSXMA) is the most popular stock in this table. On the other hand TELUS Corporation (NYSE:TU) is the least popular one with only 15 bullish hedge fund positions. HEICO Corporation (NYSE:HEI) is not the most popular stock in this group but hedge fund interest is still above average. 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 12.3% in 2020 through June 30th but still beat the market by 15.5 percentage points. Hedge funds were also right about betting on HEI as the stock returned 33.7% in Q2 and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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Disclosure: None. This article was originally published at Insider Monkey.