U.S. Markets closed

Did Hedge Funds Drop The Ball On Skechers USA Inc (SKX)?

Nina Todic

Hedge funds and large money managers usually invest with a focus on the long-term horizon and, therefore, short-lived dips or bumps on the charts, usually don't make them change their opinion towards a company. This time it may be different. During the fourth quarter of 2018 we observed increased volatility and small-cap stocks underperformed the market. Things completely reversed during the first half of 2019. Hedge fund investor letters indicated that they are cutting their overall exposure, closing out some position and doubling down on others. Let’s take a look at the hedge fund sentiment towards Skechers USA Inc (NYSE:SKX) to find out whether it was one of their high conviction long-term ideas.

Skechers USA Inc (NYSE:SKX) was in 23 hedge funds' portfolios at the end of June. SKX has seen a decrease in activity from the world's largest hedge funds in recent months. There were 24 hedge funds in our database with SKX positions at the end of the previous quarter. Our calculations also showed that SKX isn't among the 30 most popular stocks among hedge funds.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 market by 40 percentage points since May 2014 through May 30, 2019 (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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in our short portfolio.

Dmitry Balyasny

Unlike some fund managers who are betting on Dow reaching 40000 in a year, our long-short investment strategy doesn't rely on bull markets to deliver double digit returns. We only rely on hedge fund buy/sell signals. Let's check out the latest hedge fund action surrounding Skechers USA Inc (NYSE:SKX).

What does smart money think about Skechers USA Inc (NYSE:SKX)?

At the end of the second quarter, a total of 23 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -4% from one quarter earlier. By comparison, 24 hedge funds held shares or bullish call options in SKX a year ago. With the smart money's capital changing hands, there exists a select group of notable hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

No of Hedge Funds with SKX Positions

More specifically, AQR Capital Management was the largest shareholder of Skechers USA Inc (NYSE:SKX), with a stake worth $121.2 million reported as of the end of March. Trailing AQR Capital Management was Tremblant Capital, which amassed a stake valued at $74.1 million. Balyasny Asset Management, Citadel Investment Group, and Two Sigma Advisors were also very fond of the stock, giving the stock large weights in their portfolios.

Judging by the fact that Skechers USA Inc (NYSE:SKX) has witnessed a decline in interest from the aggregate hedge fund industry, logic holds that there were a few hedge funds who sold off their entire stakes in the second quarter. It's worth mentioning that Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital cut the biggest position of the "upper crust" of funds monitored by Insider Monkey, worth about $41.5 million in stock. Andrew Feldstein and Stephen Siderow's fund, Blue Mountain Capital, also cut its stock, about $4.4 million worth. These moves are interesting, as total hedge fund interest dropped by 1 funds in the second quarter.

Let's also examine hedge fund activity in other stocks - not necessarily in the same industry as Skechers USA Inc (NYSE:SKX) but similarly valued. These stocks are Axis Capital Holdings Limited (NYSE:AXS), The Hanover Insurance Group, Inc. (NYSE:THG), Williams-Sonoma, Inc. (NYSE:WSM), and Turkcell Iletisim Hizmetleri A.S. (NYSE:TKC). This group of stocks' market valuations are closest to SKX's market valuation.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position AXS,27,822381,-4 THG,20,254847,-3 WSM,27,304968,-2 TKC,7,8268,0 Average,20.25,347616,-2.25 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 20.25 hedge funds with bullish positions and the average amount invested in these stocks was $348 million. That figure was $370 million in SKX's case. Axis Capital Holdings Limited (NYSE:AXS) is the most popular stock in this table. On the other hand Turkcell Iletisim Hizmetleri A.S. (NYSE:TKC) is the least popular one with only 7 bullish hedge fund positions. Skechers USA Inc (NYSE:SKX) 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 (view the video below) among hedge funds returned 24.4% in 2019 through September 30th and outperformed the S&P 500 ETF (SPY) by 4 percentage points. Hedge funds were also right about betting on SKX as the stock returned 18.6% during the third quarter and outperformed the market. Hedge funds were rewarded for their relative bullishness. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

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

Related Content