Investor Michael Burry, renowned for his prescient bet against the U.S. housing market before the 2008 financial crisis, has identified a potential recovery opportunity in Build-A-Bear Workshop. Despite a significant decline in the company’s stock value this year, Burry sees room for growth, driven by a possible ‘short squeeze’ effect due to the high percentage of short positions against the stock.

Burry’s analysis, shared on the Substack platform, highlights that approximately 25% of Build-A-Bear’s freely traded shares are held in short positions. This scenario, according to Burry, could create conditions for a ‘short squeeze’—a rapid increase in stock price as short sellers are forced to buy shares to cover their positions, further driving up the price. Such a squeeze could occur if the stock price begins to rise, compelling short sellers to close their positions to limit losses.

The stock of Build-A-Bear has experienced significant fluctuations over recent years. It plummeted to as low as $1.80 during the pandemic but surged to over $75 last year. Currently, it trades at around $25. Despite the recent downturn, the company’s stock value has seen substantial growth over the past five years, at one point outperforming even Nvidia’s returns in 2023.

Build-A-Bear Workshop, which operates 662 locations across 37 countries, has been adapting its business model to address changing consumer habits and the rising competition from digital entertainment. Burry commended the company’s efforts to modernize its sales approach and expand through partnerships and wholesale models. Notably, 129 of its locations were opened in the last two years, indicating a strategic expansion that requires minimal capital investment from the company itself.

Burry’s confidence in Build-A-Bear’s potential recovery is not solely based on the stock’s speculative dynamics. He points to the company’s resilience in surviving past financial crises and adapting to shifts in consumer preferences. However, he acknowledges the challenges posed by weakened consumer spending on non-essential items like plush toys, which could impact the company’s recovery trajectory.

The situation with Build-A-Bear’s stock has drawn comparisons to GameStop, which experienced a similar short squeeze phenomenon driven by retail investor interest and short covering. Burry, who previously invested in GameStop, has since exited that position. In the case of Build-A-Bear, his assessment hinges on a combination of potential market dynamics and the company’s business growth prospects, despite the current pressures on consumer spending and the significant stock decline this year.

While Burry’s analysis offers a hopeful outlook for Build-A-Bear, it is essential to note that the potential for a short squeeze remains speculative and not guaranteed. The broader market conditions and consumer behavior will play critical roles in determining the company’s ability to capitalize on this opportunity. As such, investors should consider the inherent risks and uncertainties associated with the stock’s current market position.