Houlihan Lokey: The small-cap bank stock to buy in a recession

Banking stocks have plummeted in the past few months even as central banks have embraced a hawkish tone. The closely watched SPDR Bank ETF (KBE) has fallen by about 28% from its highest level in 2022. Major banks like JP Morgan, Morgan Stanley, and Wells Fargo are all in a bear market. Here’s why Houlihan Lokey (NYSE: HLI) stock is set to bounce back in 2022.

The bank to buy in a recession

Houlihan Lokey is a relatively small bank that most people have never heard about. It is a small cap bank with a market cap of about $5 billion. Yet, it is a bank that many companies and investment banks know about well.

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Houlihan is an investment bank that provides services in three segments like corporate finance, financial restructuring, and financial and valuation advisory.

The HLI stock has crashed by more than 37% from its highest point this year. This decline is mostly because of the weak performance of investment banking globally. According to WSJ, the total volume of M&A, IPOs, equity, and debt have all fallen by more than 20%.

The main reason why Houlihan Lokey will likely do well is because of its strong presence in the restructuring business. 

According to WSJ, most analysts expect that a recession will happen in the next 12 months. In its poll, analysts have a 44% probability of a recession.

At the same time, the Fed has started lowering its balance sheet and aggressively hiking interest rates. And in a recent statement, Jerome Powell warned that its policy would have some pain. Investors are experiencing this pain as stocks and cryptocurrency prices have retreated.

Why Houlihan Lokey is a good recession stock

For starters, Houlihan Lokey is an expert in corporate restructuring. For example, in 2021, the bank was tapped to handle the restructuring of Evergrande, the giant real estate company in China.

In the past two decades, the company was hired to manage the restructuring of some of the biggest firms.Precisely, it handled 12 of the 15 biggest bankruptcies in the US. These companies include Lehman Brothers, Washington Mutual, General Motors, Enron, Conseco, PG&E, CIT Group, and Thornburg Mortgage among others. 

Corporate bankruptcies have been falling recently because of the availability of credit. All these have helped drag the Houlihan Lokey stock price. However, analysts expect that many zombie companies will be under pressure in the coming months as liquidity dries up. If this happens, many of these companies will likely turn to Houlihan Lokey for its expertise. 

Therefore, while other segments of Houlihan will struggle, there is a possibility that its restructuring business will offer a buffer.

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