An Investor Shorts Mattel and the Hedge Fund Industry is Underweight; Should You Follow Them?

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If you are at the helm of the toy maker Mattel, Inc. (NASDAQ:MAT), business might seem tough, but it just got a bit tougher after a ‘short pitch’ at the Sohn Canada Investment Conference 2015 by David Zorub from BlueMountain Capital, managed by Andrew Feldstein and Stephen Siderow. According to the analyst only a launch of a new key product can save the company from a decline as even activist investors are unlikely to touch the business given its lack of growth potential or a sizable generation of free cash flow. The company set to thrive in Mattel’s stead is its competitor Hasbro, Inc. (NASDAQ:HAS) with the help of Walt Disney Co (NYSE:DIS). This article will try to dig deeper into this dynamic, while overviewing the general hedge fund sentiment surrounding Mattel.

Andrew Feldstein and Stephen Siderow

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An everyday investor does not have the time or the required skill-set to carry out an in-depth analysis of equities and identify companies with the best future prospects like hedge funds can. However, it is also not a good idea to pay the egregiously high fees that investment firms charge for their stock picking expertise. Thus a retail investor is better off to monkey the most popular stock picks among hedge funds by him or herself. But not just any picks mind you. Our research has shown that a portfolio based on hedge funds’ top stock picks (which are invariably comprised entirely of large-cap companies) falls considerably short of a portfolio based on their best small-cap stock picks. The most popular large-cap stocks among hedge funds underperformed the market by an average of seven basis points per month in our back tests, whereas the 15 most popular small-cap stock picks among hedge funds outperformed the market by nearly a percentage point per month over the same period between 1999 and 2012. Since officially launching our small-cap strategy in August 2012 it has performed just as predicted, beating the market by over 58 percentage points and returning over 118%, while hedge funds have collectively underperformed the market (read more details here).

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The latest nail in Mattel, Inc. (NASDAQ:MAT)’s coffin was hammered by the mass-media conglomerate Walt Disney Co (NYSE:DIS), which had also been responsible for critical life support to the company amidst its weakening brands such as Barbie and Monster High. While the latter was ranked as the number one brand in 2012 it fell to the sixth position in 2014 according to Zorub, whose analysis shows that on average declines continue at a rate of more than 25% for slumping brands in the toy industry. Disney recently announced a collaboration with Hasbro, Inc. (NASDAQ:HAS) for merchandising Disney’s entertainment figurines including dolls based on the hit movie Frozen, which had earlier been a major catalyst for Mattel as its own brands continued on their downhill trajectory. This has been an ongoing trend as Hasbro now dominates many movie names including spider man and iron man etc. and since these contracts usually have a long time horizon attached to them Mattel, Inc. (NASDAQ:MAT)’s short term prospects of breaking in look bleak.

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