Should You Buy Baldwin & Lyons Inc (BWINB)?

Looking for high-potential stocks? Just follow the big players within the hedge fund industry. Why should you do so? Let’s take a brief look at what statistics have to say about hedge funds’ stock picking abilities to illustrate. The Standard and Poor’s 500 Index returned approximately 5.2% in the 12 months ending October 30, with more than 51% of the stocks in the index failing to beat the benchmark. Therefore, the odds that one will pin down a winner by randomly picking a stock are less than the odds in a fair coin-tossing game. Conversely, hedge funds’ 30 preferred S&P 500 stocks (as of September 2014) generated a return of 9.5% during the same 12-month period, with 63% of these stock picks outperformed the broader market benchmark. Coincidence? It might happen to be so, but it is unlikely. Our research covering a 16-year period indicates that hedge funds’ stock picks generate superior risk-adjusted returns. That’s why we believe it is wise to check hedge fund activity before you invest your time or your savings on a stock like Baldwin & Lyons Inc (NASDAQ:BWINB).

Baldwin & Lyons Inc (NASDAQ:BWINB) shares lost 5% in the third quarter and are 7% in the red year-to-date, which makes the stock cheaper at around 12.8 times earnings, compared to the average for the S&P 500. However, the funds from our database are cautious toward the stock, as only five funds from our database reported stakes in Baldwin & Lyons as of the end of September.

However, the level and the change in hedge fund popularity aren’t the only variables you need to analyze to decipher hedge funds’ perspectives. A stock may witness a boost in popularity, but it may still be less popular than similarly priced stocks. That’s why at the end of this article we will examine companies such as Del Frisco’s Restaurant Group Inc (NASDAQ:DFRG), Hampton Roads Bankshares, Inc. (NASDAQ:HMPR), and Arbor Realty Trust, Inc. (NYSE:ABR) to gather more data points.

In the eyes of most traders, hedge funds are seen as underperforming, old investment vehicles of the past. While there are more than 8000 funds trading at present, Our experts choose to focus on the upper echelon of this group, approximately 700 funds. These hedge fund managers administer the lion’s share of the smart money’s total asset base, and by watching their finest equity investments, Insider Monkey has uncovered many investment strategies that have historically exceeded the S&P 500 index. Insider Monkey’s small-cap hedge fund strategy exceeded the S&P 500 index by 12 percentage points per annum for a decade in their back tests.

Keeping this in mind, we’re going to take a look at the fresh action regarding Baldwin & Lyons Inc (NASDAQ:BWINB).

Hedge fund activity in Baldwin & Lyons Inc (NASDAQ:BWINB)

At the Q3’s end, a total of 5 of the hedge funds tracked by Insider Monkey held long positions in this stock, unchanged over the quarter. With hedgies’ sentiment swirling, there exists an “upper tier” of notable hedge fund managers who were upping their stakes considerably (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Prem Watsa’s Fairfax Financial Holdings has the number one position in Baldwin & Lyons Inc (NASDAQ:BWINB), worth close to $21 million, accounting for 1.9% of its total 13F portfolio. Coming in second is Intrepid Capital Management, managed by Mark Travis, which holds a $13 million position; the fund has 4.5% of its 13F portfolio invested in the stock. The remaining members of the smart money that are bullish include Jeffrey Bronchick’s Cove Street Capital, Chuck Royce’s Royce & Associates and Jim Simons’ Renaissance Technologies.

Earlier we told you that the aggregate hedge fund interest in the stock was unchanged and we view this as a negative development. Even though there weren’t any hedge funds dumping their holdings during the third quarter, there weren’t any hedge funds initiating brand new positions. This indicates that hedge funds, at the very best, perceive this stock as dead money and they haven’t identified any viable catalysts that can attract investor attention.

Let’s now review hedge fund activity in other stocks similar to Baldwin & Lyons Inc (NASDAQ:BWINB). We will take a look at Del Frisco’s Restaurant Group Inc (NASDAQ:DFRG), Hampton Roads Bankshares, Inc. (NASDAQ:HMPR), Arbor Realty Trust, Inc. (NYSE:ABR), and Parker Drilling Company (NYSE:PKD). This group of stocks’ market caps resemble BWINB’s market cap.

As you can see these stocks had an average of 12 hedge funds with bullish positions and the average amount invested in these stocks was $51 million. That figure was $54 million in BWINB’s case. Del Frisco’s Restaurant Group Inc (NASDAQ:DFRG) is the most popular stock in this table, while Hampton Roads Bankshares, Inc. (NASDAQ:HMPR) is the least popular one with only 6 bullish hedge fund positions. Compared to these stocks Baldwin & Lyons Inc (NASDAQ:BWINB) is even less popular than HMPR. Considering that hedge funds aren’t fond of this stock in relation to other companies analyzed in this article, it may be a good idea to analyze it in detail and understand why the smart money isn’t behind this stock. This isn’t necessarily bad news. Although it is possible that hedge funds may think the stock is overpriced and view the stock as a short candidate, they may not be very familiar with the bullish thesis. In either case more research is warranted.