We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (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. Keeping this in mind, let’s take a look at whether Houlihan Lokey Inc (NYSE:HLI) is a good investment right now. We like to check what the smart money thinks first before doing extensive research on a given stock. Although there have been several high profile failed hedge fund picks, the consensus picks among hedge fund investors have historically outperformed the market after adjusting for known risk attributes. It’s not surprising given that hedge funds have access to better information and more resources to predict the winners in the stock market.
Is Houlihan Lokey Inc (NYSE:HLI) a sound investment today? The smart money is in a bearish mood. The number of long hedge fund positions decreased by 7 lately. Our calculations also showed that HLI isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
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 S&P 500 ETFs by 41 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 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.
We leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we are checking out investment opportunities like this one. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Now we’re going to view the recent hedge fund action surrounding Houlihan Lokey Inc (NYSE:HLI).
How have hedgies been trading Houlihan Lokey Inc (NYSE:HLI)?
Heading into the first quarter of 2020, a total of 10 of the hedge funds tracked by Insider Monkey were long this stock, a change of -41% from the previous quarter. By comparison, 18 hedge funds held shares or bullish call options in HLI a year ago. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.
More specifically, Ariel Investments was the largest shareholder of Houlihan Lokey Inc (NYSE:HLI), with a stake worth $52.8 million reported as of the end of September. Trailing Ariel Investments was Royce & Associates, which amassed a stake valued at $46.3 million. Schonfeld Strategic Advisors, Balyasny Asset Management, and Citadel Investment Group 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 Ariel Investments allocated the biggest weight to Houlihan Lokey Inc (NYSE:HLI), around 0.66% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, earmarking 0.41 percent of its 13F equity portfolio to HLI.
Seeing as Houlihan Lokey Inc (NYSE:HLI) has witnessed falling interest from the smart money, it’s safe to say that there exists a select few hedgies that slashed their entire stakes heading into Q4. Interestingly, Paul Marshall and Ian Wace’s Marshall Wace LLP sold off the largest investment of the 750 funds followed by Insider Monkey, valued at close to $14.7 million in stock, and Ravi Chopra’s Azora Capital was right behind this move, as the fund dumped about $5.9 million worth. These transactions are important to note, as total hedge fund interest dropped by 7 funds heading into Q4.
Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as Houlihan Lokey Inc (NYSE:HLI) but similarly valued. These stocks are Nextera Energy Partners LP (NYSE:NEP), Mantech International Corp (NASDAQ:MANT), Enphase Energy Inc (NASDAQ:ENPH), and American States Water Co (NYSE:AWR). This group of stocks’ market values match HLI’s market value.
|Ticker||No of HFs with positions||Total Value of HF Positions (x1000)||Change in HF Position|
View table here if you experience formatting issues.
As you can see these stocks had an average of 25 hedge funds with bullish positions and the average amount invested in these stocks was $169 million. That figure was $128 million in HLI’s case. Enphase Energy Inc (NASDAQ:ENPH) is the most popular stock in this table. On the other hand Nextera Energy Partners LP (NYSE:NEP) is the least popular one with only 17 bullish hedge fund positions. Compared to these stocks Houlihan Lokey Inc (NYSE:HLI) is even less popular than NEP. Hedge funds clearly dropped the ball on HLI as the stock delivered strong returns, though hedge funds’ consensus picks still generated respectable returns. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 13.0% in 2020 through April 6th but still beat the market by 4.2 percentage points. A small number of hedge funds were also right about betting on HLI as the stock returned 18.6% during the same time period and outperformed the market by an even larger margin.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.