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Did Hedge Funds Make The Right Call On H&R Block, Inc. (HRB) ?

We know that hedge funds generate strong, risk-adjusted returns over the long run, which is why imitating the picks that they are collectively bullish on can be a profitable strategy for retail investors. With billions of dollars in assets, professional investors have to conduct complex analyses, spend many resources and use tools that are not always available for the general crowd. This doesn’t mean that they don’t have occasional colossal losses; they do. However, it is still a good idea to keep an eye on hedge fund activity. With this in mind, let’s examine the smart money sentiment towards H&R Block, Inc. (NYSE:HRB) and determine whether hedge funds skillfully traded this stock.

Is H&R Block, Inc. (NYSE:HRB) a buy here? Money managers were becoming less confident. The number of bullish hedge fund bets dropped by 11 lately. Our calculations also showed that HRB 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.

In the financial world there are a large number of tools investors have at their disposal to grade stocks. A pair of the most under-the-radar tools are hedge fund and insider trading indicators. We have shown that, historically, those who follow the top picks of the best fund managers can outperform the broader indices by a solid amount. Insider Monkey’s monthly stock picks returned 101% since March 2017 and outperformed the S&P 500 ETFs by more than 58 percentage points. Our short strategy outperformed the S&P 500 short ETFs by 20 percentage points annually (see the details here). That’s why we believe hedge fund sentiment is a useful indicator that investors should pay attention to.

Mario Gabelli of GAMCO Investors

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Cannabis stocks are roaring back in 2020, so we are checking out this under-the-radar stock. We go through lists like the 10 most profitable companies in the world 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. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. Keeping this in mind we’re going to take a glance at the latest hedge fund action encompassing H&R Block, Inc. (NYSE:HRB).

Hedge fund activity in H&R Block, Inc. (NYSE:HRB)

At Q1’s end, a total of 19 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -37% from the previous quarter. The graph below displays the number of hedge funds with bullish position in HRB over the last 18 quarters. With hedge funds’ sentiment swirling, there exists a few key hedge fund managers who were adding to their holdings significantly (or already accumulated large positions).

The largest stake in H&R Block, Inc. (NYSE:HRB) was held by D E Shaw, which reported holding $65.7 million worth of stock at the end of September. It was followed by AQR Capital Management with a $34 million position. Other investors bullish on the company included Polaris Capital Management, Citadel Investment Group, and GAMCO Investors. In terms of the portfolio weights assigned to each position Polaris Capital Management allocated the biggest weight to H&R Block, Inc. (NYSE:HRB), around 1.55% of its 13F portfolio. Cognios Capital is also relatively very bullish on the stock, dishing out 0.6 percent of its 13F equity portfolio to HRB.

Because H&R Block, Inc. (NYSE:HRB) has witnessed a decline in interest from hedge fund managers, we can see that there lies a certain “tier” of money managers that slashed their full holdings last quarter. At the top of the heap, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital dumped the largest stake of the 750 funds watched by Insider Monkey, totaling close to $7.8 million in stock. Anand Parekh’s fund, Alyeska Investment Group, also said goodbye to its stock, about $5.7 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 11 funds last quarter.

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as H&R Block, Inc. (NYSE:HRB) but similarly valued. We will take a look at Murphy USA Inc. (NYSE:MUSA), AMN Healthcare Services Inc (NYSE:AMN), The Hain Celestial Group, Inc. (NASDAQ:HAIN), and Appian Corporation (NASDAQ:APPN). This group of stocks’ market valuations match HRB’s market valuation.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MUSA 24 198115 -4
AMN 22 78978 12
HAIN 20 704604 3
APPN 17 374002 0
Average 20.75 338925 2.75

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.75 hedge funds with bullish positions and the average amount invested in these stocks was $339 million. That figure was $178 million in HRB’s case. Murphy USA Inc. (NYSE:MUSA) is the most popular stock in this table. On the other hand Appian Corporation (NASDAQ:APPN) is the least popular one with only 17 bullish hedge fund positions. H&R Block, Inc. (NYSE:HRB) 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 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 18.6% in 2020 through July 27th and surpassed the market by 17.1 percentage points. Unfortunately HRB wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); HRB investors were disappointed as the stock returned 7.1% since Q1 and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

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