It seems a quaint idea these days but there was a time that "hedge fund" actually meant controlling portfolio risk by keeping a balance between longs and shorts. Managers would pick their favorite name in a sector and get long then hedge their risk by shorting their least favorite stock in the same sector. While it's sexier these days to take massive risks in exotic derivatives involving paired trades in correlated global assets, we old timers still enjoy the more traditional method.
Though not an old timer herself, Lisa Rapauano founder and portfolio manager of Lane Five Capital Management, is a traditionalist unafraid to do fundamental work and take positions based on what she finds. That's right, Breakout spent a whole segment without once mentioning Europe or forcing me to rage against the ratings agencies. Five-minutes of a conversation focused on domestic fundamentals with a real live contrarian. Sit back in drink it in like a cool lemonade on a 100-degree day.
Long: Skechers (SKX)
When we last saw Skechers (SKX), the company was being hyped to the heavens based on enthusiasm over Shape-ups, a shoe which allegedly toned your backside as you walked. The fad passed when it was discovered that the glute tightening feature only worked if your walks were daily and over 20 miles per session. If you think the news disappointed the flabby-tush set, it emotionally destroyed Skecher bulls and the company itself. When Skechers got caught with millions of dollars of unsold Shape-ups, the stock dropped from over $40/share into the teens; over 50% just in the last 52-weeks.
The shorts are banking on more stock pain to come when Skechers finally takes the hit and writes down the remaining inventory. But Rapuano is taking the other side, accumulating stock right here, right now. She says Skechers was a vibrant business before the Shape-up debacle and will be one again once the clean up the mess. Ex the looming write-down, she's looking for $2 of EPS, putting the company at 7x earnings and trading basically at book value.
Short: Vera Bradley (VRA)
Many times when one company gets hot, investors start looking for the next big thing in a related space. Rapuano thinks that's the situation with the stunningly successful Lululemon (LULU) and Vera Bradley (VRA). Lulu, a maker of yoga wear and other leisure clothing, has done tremendously well building its stores and distribution network. Vera Bradley, maker of bags and leisure items has done less tremendously well distributing its own product and is beginning to roll out new company stores.Read More »from Buy Skechers, Short Vera Bradley: Portfolio Manager