How HealthSouth Corp (HLS) Stacks Up Against Its Peers

We have been waiting for this for a year and finally the third quarter ended up showing a nice bump in the performance of small-cap stocks. Both the S&P 500 and Russell 2000 were up since the end of the second quarter, but small-cap stocks outperformed the large-cap stocks by double digits. This is important for hedge funds, which are big supporters of small-cap stocks, because their investors started pulling some of their capital out due to poor recent performance. It is very likely that equity hedge funds will deliver better risk adjusted returns in the second half of this year. In this article we are going to look at how this recent market trend affected the sentiment of hedge funds towards HealthSouth Corp (NYSE:HLS), and what that likely means for the prospects of the company and its stock.

HealthSouth Corp (NYSE:HLS) was in 22 hedge funds’ portfolios at the end of September. HLS shareholders have witnessed a decrease in enthusiasm from smart money of late. There were 25 hedge funds in our database with HLS positions at the end of the previous quarter. The level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Leidos Holdings Inc (NYSE:LDOS), ONE Gas Inc (NYSE:OGS), and Endo Health Solutions Inc (NASDAQ:ENDP) to gather more data points.

At Insider Monkey, we’ve developed an investment strategy that has delivered market-beating returns over the past 12 months. Our strategy identifies the 100 best-performing funds of the previous quarter from among the collection of 700+ successful funds that we track in our database, which we accomplish using our returns methodology. We then study the portfolios of those 100 funds using the latest 13F data to uncover the 30 most popular mid-cap stocks (market caps of between $1 billion and $10 billion) among them to hold until the next filing period. This strategy delivered 18% gains over the past 12 months, more than doubling the 8% returns enjoyed by the S&P 500 ETFs.

How are hedge funds trading HealthSouth Corp (NYSE:HLS)?

Heading into the fourth quarter of 2016, a total of 22 of the hedge funds tracked by Insider Monkey were bullish on this stock, a drop of 12% from one quarter earlier. Nonetheless, smart money ownership remains solid after many funds jumped in during Q2. With the smart money’s sentiment swirling, there exists a select group of key hedge fund managers who were boosting their holdings significantly (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Larry Robbins’ Glenview Capital has the largest position in HealthSouth Corp (NYSE:HLS), worth close to $290.9 million, amounting to 2.1% of its total 13F portfolio. On Glenview Capital’s heels is Arthur B Cohen and Joseph Healey of Healthcor Management LP, with a $66.9 million position; the fund has 4.1% of its 13F portfolio invested in the stock. Other peers with similar optimism consist of Mariko Gordon’s Daruma Asset Management and Israel Englander’s Millennium Management.

Due to the fact that HealthSouth Corp (NYSE:HLS) has witnessed bearish sentiment from the aggregate hedge fund industry, logic holds that there were a few fund managers that decided to sell off their entire stakes last quarter. At the top of the heap, Patrick Hughes and Loren Katzovitz’s Deimos Asset Management dropped the largest position of the “upper crust” of funds tracked by Insider Monkey, valued at about $1.2 million in stock. George Hall’s fund, Clinton Group, also dropped its stock, about $0.7 million worth. These moves are important to note, as total hedge fund interest fell by 3 funds last quarter.

Let’s now take a look at hedge fund activity in other stocks – not necessarily in the same industry as HealthSouth Corp (NYSE:HLS) but similarly valued. We will take a look at Leidos Holdings Inc (NYSE:LDOS), ONE Gas Inc (NYSE:OGS), Endo Health Solutions Inc (NASDAQ:ENDP), and First Niagara Financial Group Inc. (NASDAQ:FNFG). This group of stocks’ market valuations are closest to HLS’s market valuation.

As you can see these stocks had an average of 18 hedge funds with bullish positions and the average amount invested in these stocks was $377 million. That figure was $543 million in HLS’s case. Endo Health Solutions Inc (NASDAQ:ENDP) is the most popular stock in this table. On the other hand First Niagara Financial Group Inc. (NASDAQ:FNFG) is the least popular one with only 1 bullish hedge fund positions. HealthSouth Corp (NYSE:HLS) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard ENDP might be a better candidate to consider a long position in.

Disclosure: None