Should You Avoid Houlihan Lokey Inc (HLI)?

Legendary investors such as Leon Cooperman and Seth Klarman earn enormous amounts of money for themselves and their investors by doing in-depth research on small-cap stocks that big brokerage houses don’t publish. Small cap stocks -especially when they are screened well- can generate substantial outperformance versus a boring index fund. That’s why we analyze the activity of those elite funds in these small-cap stocks. In the following paragraphs, we analyze Houlihan Lokey Inc (NYSE:HLI) from the perspective of those elite funds.

Houlihan Lokey Inc (NYSE:HLI) shareholders have witnessed a decrease in hedge fund sentiment lately. HLI was in 14 hedge funds’ portfolios at the end of the third quarter of 2018. There were 18 hedge funds in our database with HLI holdings at the end of the previous quarter. Our calculations also showed that hli isn’t among the 30 most popular stocks among hedge funds.

Why do we pay any attention at all to hedge fund sentiment? Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the market by 18 percentage points since May 2014 through December 3, 2018 (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 24% through December 3, 2018. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Chuck Royce

Let’s take a look at the new hedge fund action encompassing Houlihan Lokey Inc (NYSE:HLI).

What have hedge funds been doing with Houlihan Lokey Inc (NYSE:HLI)?

Heading into the fourth quarter of 2018, a total of 14 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -22% from one quarter earlier. On the other hand, there were a total of 10 hedge funds with a bullish position in HLI at the beginning of this year. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

No of Hedge Funds with HLI Positions

The largest stake in Houlihan Lokey Inc (NYSE:HLI) was held by Ariel Investments, which reported holding $62.4 million worth of stock at the end of September. It was followed by Millennium Management with a $47.1 million position. Other investors bullish on the company included Royce & Associates, Citadel Investment Group, and Renaissance Technologies.

Judging by the fact that Houlihan Lokey Inc (NYSE:HLI) has faced declining sentiment from hedge fund managers, logic holds that there exists a select few funds who were dropping their entire stakes last quarter. It’s worth mentioning that Anand Parekh’s Alyeska Investment Group sold off the largest stake of all the hedgies monitored by Insider Monkey, valued at an estimated $15.8 million in stock. Glenn Russell Dubin’s fund, Highbridge Capital Management, also dropped its stock, about $4 million worth. These bearish behaviors are important to note, as aggregate hedge fund interest dropped by 4 funds last quarter.

Let’s go over hedge fund activity in other stocks similar to Houlihan Lokey Inc (NYSE:HLI). These stocks are Jagged Peak Energy Inc. (NYSE:JAG), LendingTree, Inc (NASDAQ:TREE), NorthWestern Corporation (NYSE:NWE), and Nuveen AMT-Free Municipal Credit Income Fund (NYSE:NVG). All of these stocks’ market caps are closest to HLI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
JAG 15 93556 5
TREE 18 69523 -1
NWE 15 135790 2
NVG 3 571 -1
Average 12.75 74860 1.25

View table here if you experience formatting issues.

As you can see these stocks had an average of 12.75 hedge funds with bullish positions and the average amount invested in these stocks was $75 million. That figure was $206 million in HLI’s case. LendingTree, Inc (NASDAQ:TREE) is the most popular stock in this table. On the other hand Nuveen AMT-Free Municipal Credit Income Fund (NYSE:NVG) is the least popular one with only 3 bullish hedge fund positions. Houlihan Lokey Inc (NYSE:HLI) 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 TREE might be a better candidate to consider a long position.

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