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Did Hedge Funds Drop The Ball On Barnes & Noble Education Inc (BNED) ?

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Amid an overall bull market, many stocks that smart money investors were collectively bullish on surged through the end of November. Among them, Facebook and Microsoft ranked among the top 3 picks and these stocks gained 54% and 51% respectively. Our research shows that most of the stocks that smart money likes historically generate strong risk-adjusted returns. That's why we weren't surprised when hedge funds’ top 20 large-cap stock picks generated a return of 37.4% through the end of November and outperformed the broader market benchmark by 9.9 percentage points.This is why following the smart money sentiment is a useful tool at identifying the next stock to invest in.

Barnes & Noble Education Inc (NYSE:BNED) investors should be aware of a decrease in enthusiasm from smart money lately. Our calculations also showed that BNED isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).

5 Most Popular Stocks Among Hedge Funds
5 Most Popular Stocks Among Hedge Funds

Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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_193003" align="aligncenter" width="450"]

Chuck Royce
Chuck Royce

Chuck Royce of Royce & Associates[/caption]

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 peek at the new hedge fund action regarding Barnes & Noble Education Inc (NYSE:BNED).

What have hedge funds been doing with Barnes & Noble Education Inc (NYSE:BNED)?

At the end of the third quarter, a total of 9 of the hedge funds tracked by Insider Monkey were long this stock, a change of -44% from the previous quarter. On the other hand, there were a total of 15 hedge funds with a bullish position in BNED a year ago. With the smart money's sentiment swirling, there exists a select group of notable hedge fund managers who were boosting their holdings meaningfully (or already accumulated large positions).

The largest stake in Barnes & Noble Education Inc (NYSE:BNED) was held by Arrowstreet Capital, which reported holding $2.2 million worth of stock at the end of September. It was followed by AQR Capital Management with a $0.9 million position. Other investors bullish on the company included Royce & Associates, Two Sigma Advisors, and PDT Partners. In terms of the portfolio weights assigned to each position Zebra Capital Management allocated the biggest weight to Barnes & Noble Education Inc (NYSE:BNED), around 0.05% of its 13F portfolio. PDT Partners is also relatively very bullish on the stock, setting aside 0.01 percent of its 13F equity portfolio to BNED.

Due to the fact that Barnes & Noble Education Inc (NYSE:BNED) has faced falling interest from the smart money, we can see that there were a few fund managers that decided to sell off their entire stakes last quarter. It's worth mentioning that John Orrico's Water Island Capital sold off the largest position of all the hedgies watched by Insider Monkey, totaling an estimated $8.2 million in stock, and Israel Englander's Millennium Management was right behind this move, as the fund cut about $0.7 million worth. These moves are important to note, as total hedge fund interest was cut by 7 funds last quarter.

Let's check out hedge fund activity in other stocks - not necessarily in the same industry as Barnes & Noble Education Inc (NYSE:BNED) but similarly valued. We will take a look at Centric Brands Inc. (NASDAQ:CTRC), Axovant Gene Therapies Ltd. (NASDAQ:AXGT), Arcturus Therapeutics Holdings Inc. (NASDAQ:ARCT), and Nabriva Therapeutics plc (NASDAQ:NBRV). This group of stocks' market values are closest to BNED's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CTRC,2,152,1 AXGT,6,10140,0 ARCT,7,6040,2 NBRV,11,31629,1 Average,6.5,11990,1 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 6.5 hedge funds with bullish positions and the average amount invested in these stocks was $12 million. That figure was $5 million in BNED's case. Nabriva Therapeutics plc (NASDAQ:NBRV) is the most popular stock in this table. On the other hand Centric Brands Inc. (NASDAQ:CTRC) is the least popular one with only 2 bullish hedge fund positions. Barnes & Noble Education Inc (NYSE:BNED) is not the most popular stock in this group but hedge fund interest is still above average. 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. Hedge funds were also right about betting on BNED as the stock returned 61.5% during the fourth quarter (through the end of November) and outperformed the market. Hedge funds were rewarded for their relative bullishness.

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

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