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Is Build-A-Bear Workshop, Inc (BBW) Going To Burn These Hedge Funds ?

Nina Todic

It seems that the masses and most of the financial media hate hedge funds and what they do, but why is this hatred of hedge funds so prominent? At the end of the day, these asset management firms do not gamble the hard-earned money of the people who are on the edge of poverty. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Of course, they may also make wrong bets in some instances, but no one knows what the future holds and how market participants will react to the bountiful news that floods in each day. The Standard and Poor’s 500 Total Return Index ETFs returned approximately 27.5% in 2019 (through the end of November). Conversely, hedge funds’ top 20 large-cap stock picks generated a return of 37.4% during the same 11-month period, with the majority of these stock picks outperforming the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering the last 18 years indicates that hedge funds' consensus stock picks generate superior risk-adjusted returns. That's why we believe it isn't a waste of time to check out hedge fund sentiment before you invest in a stock like Build-A-Bear Workshop, Inc (NYSE:BBW).

Build-A-Bear Workshop, Inc (NYSE:BBW) has seen an increase in enthusiasm from smart money in recent months. Our calculations also showed that BBW isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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 Russell 2000 ETFs by 40 percentage points since May 2014 (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.

[caption id="attachment_189632" align="aligncenter" width="450"] David Harding of Winton Capital Management[/caption]

David Harding

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world's largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, "I'm investing more today than I did back in early 2009." So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds' buy/sell signals. We're going to take a glance at the recent hedge fund action surrounding Build-A-Bear Workshop, Inc (NYSE:BBW).

What does smart money think about Build-A-Bear Workshop, Inc (NYSE:BBW)?

Heading into the fourth quarter of 2019, a total of 12 of the hedge funds tracked by Insider Monkey were long this stock, a change of 9% from the previous quarter. By comparison, 15 hedge funds held shares or bullish call options in BBW a year ago. So, let's see which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Raging Capital Management held the most valuable stake in Build-A-Bear Workshop, Inc (NYSE:BBW), which was worth $3 million at the end of the third quarter. On the second spot was Pacifica Capital Investments which amassed $2.7 million worth of shares. Renaissance Technologies, Citadel Investment Group, and Winton Capital Management 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 Pacifica Capital Investments allocated the biggest weight to Build-A-Bear Workshop, Inc (NYSE:BBW), around 1.28% of its 13F portfolio. Raging Capital Management is also relatively very bullish on the stock, dishing out 0.48 percent of its 13F equity portfolio to BBW.

As aggregate interest increased, key hedge funds were breaking ground themselves. Winton Capital Management, managed by David Harding, created the biggest position in Build-A-Bear Workshop, Inc (NYSE:BBW). Winton Capital Management had $0.2 million invested in the company at the end of the quarter. Paul Marshall and Ian Wace's Marshall Wace also made a $0.2 million investment in the stock during the quarter. The only other fund with a brand new BBW position is Peter Algert and Kevin Coldiron's Algert Coldiron Investors.

Let's check out hedge fund activity in other stocks similar to Build-A-Bear Workshop, Inc (NYSE:BBW). These stocks are Edesa Biotech, Inc. (NASDAQ:EDSA), 1895 Bancorp of Wisconsin, Inc. (NASDAQ:BCOW), China Natural Resources, Inc. (NASDAQ:CHNR), and AMREP Corporation (NYSE:AXR). This group of stocks' market caps are similar to BBW's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position EDSA,1,98,0 BCOW,1,174,0 CHNR,1,23,0 AXR,2,1238,0 Average,1.25,383,0 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 1.25 hedge funds with bullish positions and the average amount invested in these stocks was $0 million. That figure was $9 million in BBW's case. AMREP Corporation (NYSE:AXR) is the most popular stock in this table. On the other hand Edesa Biotech, Inc. (NASDAQ:EDSA) is the least popular one with only 1 bullish hedge fund positions. Compared to these stocks Build-A-Bear Workshop, Inc (NYSE:BBW) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately BBW wasn't nearly as popular as these 20 stocks and hedge funds that were betting on BBW were disappointed as the stock returned -4.8% during the first two months of the fourth quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.

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

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