Should I Buy Houghton Mifflin Harcourt Co (HMHC)?

Most investors tend to think that hedge funds and other asset managers are worthless, as they cannot beat even simple index fund portfolios. In fact, most people expect hedge funds to compete with and outperform the bull market that we have witnessed in recent years. However, hedge funds are generally partially hedged and aim at delivering attractive risk-adjusted returns rather than following the ups and downs of equity markets hoping that they will outperform the broader market. Our research shows that certain hedge funds do have great stock picking skills (and we can identify these hedge funds in advance pretty accurately), so let’s take a glance at the smart money sentiment towards Houghton Mifflin Harcourt Co (NASDAQ:HMHC).

Houghton Mifflin Harcourt Co (NASDAQ:HMHC) shares haven’t seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 25 hedge funds’ portfolios at the end of the first quarter of 2021. Our calculations also showed that HMHC isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings). At the end of this article we will also compare HMHC to other stocks including MannKind Corporation (NASDAQ:MNKD), Geopark Ltd (NYSE:GPRK), and Meridian Bancorp, Inc. (NASDAQ:EBSB) to get a better sense of its popularity.

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 115 percentage points since March 2017 (see the details here). That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Jamie Zimmerman of Litespeed Management

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, economists warn of inflation flare up. So, we are checking out this backdoor gold play that has hit peak gains of 718% in a little over a year. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. 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. You can subscribe to our free daily newsletter on our homepage. Keeping this in mind let’s review the fresh hedge fund action encompassing Houghton Mifflin Harcourt Co (NASDAQ:HMHC).

Do Hedge Funds Think HMHC Is A Good Stock To Buy Now?

At Q1’s end, a total of 25 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 0% from the previous quarter. On the other hand, there were a total of 20 hedge funds with a bullish position in HMHC a year ago. With hedgies’ capital changing hands, there exists an “upper tier” of notable hedge fund managers who were adding to their holdings meaningfully (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Gilchrist Berg’s Water Street Capital has the number one position in Houghton Mifflin Harcourt Co (NASDAQ:HMHC), worth close to $26.3 million, comprising 2.7% of its total 13F portfolio. The second most bullish fund manager is Arnaud Ajdler of Engine Capital, with a $20.8 million position; 6.7% of its 13F portfolio is allocated to the company. Remaining peers that hold long positions contain Ravee Mehta’s Nishkama Capital, Jamie Zimmerman’s Litespeed Management and Renaissance Technologies. In terms of the portfolio weights assigned to each position Litespeed Management allocated the biggest weight to Houghton Mifflin Harcourt Co (NASDAQ:HMHC), around 18.29% of its 13F portfolio. Engine Capital is also relatively very bullish on the stock, designating 6.65 percent of its 13F equity portfolio to HMHC.

Due to the fact that Houghton Mifflin Harcourt Co (NASDAQ:HMHC) has experienced a decline in interest from the smart money, we can see that there were a few hedge funds who sold off their entire stakes heading into Q2. Intriguingly, Louis Bacon’s Moore Global Investments sold off the biggest position of the “upper crust” of funds tracked by Insider Monkey, worth close to $2.1 million in stock. Benjamin A. Smith’s fund, Laurion Capital Management, also dumped its stock, about $1.5 million worth. These bearish behaviors are intriguing to say the least, as aggregate hedge fund interest stayed the same (this is a bearish signal in our experience).

Let’s go over hedge fund activity in other stocks – not necessarily in the same industry as Houghton Mifflin Harcourt Co (NASDAQ:HMHC) but similarly valued. These stocks are MannKind Corporation (NASDAQ:MNKD), Geopark Ltd (NYSE:GPRK), Meridian Bancorp, Inc. (NASDAQ:EBSB), Tutor Perini Corp (NYSE:TPC), Adverum Biotechnologies, Inc. (NASDAQ:ADVM), Kopin Corporation (NASDAQ:KOPN), and OrthoPediatrics Corp. (NASDAQ:KIDS). All of these stocks’ market caps match HMHC’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
MNKD 12 87910 1
GPRK 8 99185 -3
EBSB 15 95202 1
TPC 13 38607 -1
ADVM 22 396092 -5
KOPN 11 12726 5
KIDS 8 37342 -4
Average 12.7 109581 -0.9

View table here if you experience formatting issues.

As you can see these stocks had an average of 12.7 hedge funds with bullish positions and the average amount invested in these stocks was $110 million. That figure was $139 million in HMHC’s case. Adverum Biotechnologies, Inc. (NASDAQ:ADVM) is the most popular stock in this table. On the other hand Geopark Ltd (NYSE:GPRK) is the least popular one with only 8 bullish hedge fund positions. Compared to these stocks Houghton Mifflin Harcourt Co (NASDAQ:HMHC) is more popular among hedge funds. Our overall hedge fund sentiment score for HMHC is 75.3. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks returned 24% in 2021 through July 9th but still managed to beat the market by 6.7 percentage points. Hedge funds were also right about betting on HMHC as the stock returned 38.8% since the end of March (through 7/9) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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